Juicy Estates: Mortgage Blog

Read This Before You Refinance….

The old rule of thumb was that you should refinance if you can drop your interest rate by 2% but of course that rule of thumb was from the days when interest rates were 12 to 14 percent!  The new rule of thumb is that you should refinance if you can drop your interest rate by 1%…..here’s a tip…don’t make your financial decisions based on rules of thumb.

Many loan officers will tell you that you need to calculate your “re-coup” period by dividing cost of the refinance by the the monthly payment savings in order to determine when you “break even” point is.  Obviously there is no point in refinancing if your break even point is 36 months but you plan on selling your home in a year.

For years I have been one of the few Miami mortgage brokers that have been calculating the “total cost” of any given loan structure for my clients on both refinances and purchases.  The total cost analysis takes into consideration the tax consequences of your refinance to a lower rate that the formula mentioned above does not.

In the following example we are refinancing a $400,000 30 year fixed rate mortgage at 6% to a new $405,000 30 year fixed rate mortgage at 5%.  Why is the new loan $405,000 you ask…because we are including the closing cost for the new loan in the loan amount so the home owner is not coming out of pocket with any money.

This first example illustrates the monthly payment savings achieved by engaging in the refinance.

As you will note it appears that the home owner will be saving $224 per month….nice.

But let’s take into consideration the mortgage interest deduction given a 25% tax bracket.

Because the home owner is paying a lower interest rate the tax benefit of the mortgage interest deduction is less so in actuality the month savings is only $146. 

When ever you refinance or purchase residential real estate your Miami mortgage broker should be calculating the total cost of the financing structure you choose and advising you on what will best fit the needs of your and your family.

Send me a note  and I will prepare a total cost analysis for you free of charge…because the consultation is free but the advice is priceless.

This entry was posted on Thursday, December 25th, 2008 at 10:33 pm and is filed under Home, Mortgage News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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