Some borrowers may lose money even with a smaller monthly payment
By Dian Hymer, Monday, December 3, 2012.
Unless you’re a serial refinancer — someone who refinances whenever rates drop 1/4 to 1/2 percent — you may not be aware of the mounds of documentation required to refinance a home. Get ready for a tedious process.
It may be worth the hassle if you can get a 30-year fixed-rate mortgage with an interest rate of less than 4 percent. During the week ending Nov. 21, rates on 30-year fixed-rate conforming mortgages fell to 3.31 percent — an all-time low in Freddie Mac records dating to 1971.
HOUSE HUNTING TIP: When a loan agent or mortgage broker quotes an interest rate, be sure to ask if there are any fees involved. If so, find out the amount and also the amount of the monthly mortgage payment on the new mortgage. Then subtract the amount of the new monthly mortgage payment from the one you are currently paying to determine how much you will save per month.
The next step is to determine the time it will take to recoup the cost of the loan origination fees. Divide the amount of the upfront fees by the amount you’ll save per month on the new mortgage to find out how many months it will take to break even. If it will take years and you plan to move next year, you’ll lose money by refinancing even though your monthly payment will be lower.