Should you refinance?

A large national lender offered to refinance one of our clients' homes last month; the lender carries the current mortgage. The current loan amount is $151,000. The loan interest rate would have changed from 8.5% down to just under 6%. The payment amount would have been lowered by about $250 per month. The cost of the refinance would have been over $7,200, which was to be added to the loan.

After our clients looked at the figures they asked for our advice. We put the figures into a spreadsheet. The refinance made NO SENSE whatsoever. It would have taken so long to make up the difference that our clients wisely refused to go through with the refinance. Here was their reasoning:

1. The new loan would have been for 30 years, where the old loan only had 26 years left to pay off. 48 payments is a lot of money, even at a lower payment amount.
2. If they sold their house within the next few years, the $250 savings per month would not have made up the additional $7,200 that was added to the loan.
3. The new interest rate was not as good as it appeared when you consider that they would be paying interest on an additional $7,200.

There were other sound reasons for not refinancing. It's been our experience in helping sellers that very few of them have been ahead on a refinance at the time they sell their house; they generally have lost money on the deal.

What's better than a refinance? Pay your loan off early. A couple who bought a home from us a couple of years ago have a monthly payment of $980. They have been paying $1,500 each month. Their interest rate is 8%. Every time they make an additional $520 payment it's like putting that money in the bank at 8% interest, because they will never have to pay interest on that $520 again. The best part is that they'll pay their house off in 9 years. That's right, they only have 7 years left to pay off their house in full. How much will they save in interest over the next 21 years? Over $161,000.

Don't think refinance. Think pay off early.