## Refinance a Mortgage?

An avid reader of FrugalJim.com, Al, wrote in to ask me a question:

Hi FrugalJim! I was just wondering your thoughts on a question I’ve been contemplating… I am currently trying to decide if I should refinance my mortgage. Currently, I have about $185,000 left on my mortgage at a rate of about 6.5% or 6.75% APR, making my monthly payments around $1,200 with 28 years and 10 months to go. I recently received a letter from my mortgage holder telling me they would knock 1 point off the fees if I refinance at a rate of 5.125% or 5.4% APR (assuming 1 point). What do you think?

-Al

Well, the first thing I would do is calculate how much you have left to pay off your current mortgage. Just multiply the 28 years and 10 months by $1,200, getting **$415,200** as the total amount you would end up spending if you kept your current mortgage.

The next thing I would do is determine the monthly payment of the refinanced mortgage. Just plug the 5.4% APR and $185,000 amount into a mortgage calculator online, and you get around **$1,000** for the monthly payment. This would end up saving you a monthly amount of **$200** off your current payment. If you multiply the $1,000 by the 30 years you would be paying it back, you would get $360,000, saving you a total of about **$55,000 **over the life of the new loan if you refinanced.

Now right away you think… “This is a No Brainer!”. But you have to wonder why the mortgage company would want you to do this, if it will save you money (ie: make them lose money) in the long run. Well the real answer is **Fees**. The banks are so hard up for cash right now, that they need every dollar they can get right now, and are only worried about making it through the next couple of years, and not the long run.

So lets figure out about how much the fees would be. Well, a refinance with 1 point would have a base fee of 1% of the refinance amount. So 1% of $185,000 is **$1,850**. And of course there will be other miscellaneous fees (application fees, title fees, appraisal fees, lawyer fees, etc), and we’ll just ball park it at **$2,000**. This brings the total cost at around **$3,850**.

Does this still make sense? Well, upfront costs would be approaching $4,000, but over the long run, you would save about $55,000. So if you kept the home for 30 more years it would definitely be worth it. Otherwise, we would probably want to know the break even point… Take the $4,000 and divide it by the monthly savings of $200 and you get 20. To break even on the refinance you would have to keep paying the mortgage for 20 months.

Well, Al… If you plan on staying in your house for more than 2 years, can get a loan payment of $1000, and don’t spend more than $4,000 in refinancing fees, I think it would be a good long term move to make.