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Is it too late to refi? 5 steps to an answer

Use this test to find out if interest rates have risen too much for you to benefit from refinancing your mortgage.

By Marilyn Lewis Jun 13, 2013 10:42AM

Arrow Up Green © Image Source, SuperStockKicking yourself because rates are going up and you haven't refinanced yet? I know, I know. Me, too.


You and I thought ultralow interest rates would last a while longer. Now we're grinding our teeth at night. Should we lock in at 3.98% -- the average rate that Freddie Mac says that buyers paid this week? Or should we hang tight hoping rates will drop again?


Still a great deal

My lender's rep says that, in the past couple years, rates fell in summer and rose in winter, contrary to previous years when rates dropped in winter and rose in summer. So maybe, I'm thinking, they'll drop again to near the 3.5% all-time lows of last November and December. Is this magical thinking? You tell me. Where do you think rates are headed?


I have to remind myself that 3.98% is, in reality, an incredibly low rate. Between 1971 and 1991, homeowners and refinancers paid double-digit mortgage interest. Rates averaged 18.45% in October 1981.


Can you picture the conversations back then? "OMG, I snagged a loan at 17.28%!" you could boast to your friends. If you feel crummy now about missing that 3.5% rate, you'll feel a lot better after looking at this Freddie Mac chart of average rates  since 1971.


What you need right now, if you haven't refinanced and want to, is a quick-and-dirty way to see if it still makes sense. You'll find an easy, five-step test below.


But, first, a smidgeon of advice from Cara Pierce, certified housing counselor at

ClearPoint Credit Counseling Solutions' Fresno, Calif., office: Don't assume a refinance is the best way to reach your goal.


For example, if you want cash to pay off credit card bills, you could end up running up those cards again with only a bigger mortgage balance to show for the trouble and expense. First, Pierce advises, talk with a financial counselor to see if there's another way to reach that goal. For example, a HUD-certified nonprofit counseling agency might be able to get your credit card companies to set up a payment plan that would cut your interest rates and monthly payments.


Nonprofit counseling is free or cheap, depending on the help you need. Use this map to find HUD-approved counseling near you.

The 5-step test

OK, here is Pierce's five-step way to estimate -- and since mortgages costs and eligibility vary greatly from one person to the next, it truly is rough estimate --  whether a refi makes sense for you right now:

  1. Decide your loan amount. Find your current loan balance on your monthly mortgage statement (or call the number on the statement and ask for it). If you can, refi just that amount. Try to avoid borrowing more. The idea is to reduce debt, not grow it.
  2. Estimate your fees. Count on paying $3,000 to $5,000 to refinance. (A so-called "no-fee" mortgage is another possibility.) The fees include everything from the lender's "origination" charge to the cost of an appraisal, a title report, a title search and a lot of other stuff. Bottom line: If you haven't got $3,000 to pay these fees in cash, add $3,000 to your loan amount.
  3. Find today's interest rate. Rates are changing constantly. For the latest, go to MSN Money. Look for "Mortgage Rates" at the far bottom left side of the page. Pick the loan you want (15-year fixed, 30-year fixed, 5/1 ARM, etc.) and note the rate.
  4. Estimate your monthly payment. Let's use MSN Money's calculator to find your estimated new monthly payment at 3.98%. Let's say you're borrowing $103,000 -- a $100,000 current mortgage balance plus $3,000 in refinance fees. Type  $103,000 into the calculator's top line, 3.98% for the interest rate and 360 months for a 30-year loan. Ignore the other fields and press "submit." Your new monthly principal and interest is about $491.
  5. Compare. Your mortgage payment includes more than just principal and interest. It also covers property tax, home insurance and maybe mortgage insurance. You'll find the amounts on your mortgage statement: Look for the "escrow" amount and also the cost of mortgage insurance, if you pay it. (Or call your mortgage servicer -- the number's on the statement.) Add these costs to the $491 for your total estimated new payment and compare it with your monthly payment today.

The big picture

Here's an example: Suppose your current mortgage interest rate is 5.25%. Your monthly principal and interest run $569 and your property tax and insurance are $220, for a total  payment of $789. With a refinance of $103,000, your tax and insurance will probably stay about the same, making your new monthly payment about $711 ($491 + $220). You'd save about $78 a month -- $936 a year -- by refinancing.


Is it worth it? Only you can decide. On one hand, there's the bother of gathering your documents and making the application. On the other, you could argue that $936 a year is $936. If you kept the mortgage for 30 years -- which you possibly could if interest rates go up and you do plan to stay in the home, that $936 a year would add up to $28,080 ($936 x 30).


As Pierce pointed out, there's more at stake here than lowering your mortgage rate and payment, however. Think through the implications. One important question to ask: How long will you stay in your home?


If you finance $3,000 in closing costs to save $100 a month on your payment, it'll take roughly 30 months -- two and a half years -- to pay off  your closing costs, Pierce estimates. (In the example above, it would take a little more than three years to do so.) If you think you'll leave before that, it's costing you more to refinance than you stand to save.

What do you think? Is now a good time to refinance, or do you think rates will drop again?


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