That’s a tricky question, but a very important one. People refinance for different reasons, some to pull cash out or adjust the term on their loan. For this purpose, let’s assume a borrower simply wants to do a refinance that will lower their monthly payment.
So…WHEN DOES IT MAKE SENSE TO REFINANCE? Well, some borrower feel they have to save a full 1% on the rate. Some believe it’s ½%. Who’s right? The truth is, IT DEPENDS ENTIRELY ON YOUR LOAN AMOUNT, especially if you are looking for a low cost or no cost loan. Because lenders use rebates to subsidize the cost of your loan, the higher the loan amount, the more the rebate. For example, let’s say the lender has ½% he can use to subsidize your loan with. And let’s say the average hard cost of a refinance is $3000 (on loans over $500,000+, we will use $4,000 as the cost because the majority of the costs are fixed no matter what the loan amount is!)
On a $100,000 loan, the lender can credit $500 of that $3000, which means you must still pay $2500 of the cost. Consider a borrower with a current rate of 3.5%, with a principal and interest payment of $449. If the rate drops 1% to 2.5%, the payment would drop $50 to $394. But it cost $2500 to save that $50. That means it would take just over 4 years to breakeven (cost divided by savings), which is okay if you are planning on keeping the house at least 5 years.
Now consider a borrower with a $500K loan. That same ½% rebate would credit $2500 of the $4000 hard cost, leaving you only $1500 to pay. Let’s say your current rate is 3.5% and you are making a $2245 payment. IF the rate drops ½% to 3%, your payment will drop to $2107, saving you $138 per month. And the breakeven will happen in only 10 months! $1500 cost divided by $139 savings. That makes a lot of sense!
Finally, take a loan amount of $1 million. The ½% rebate would credit ALL OF THE COST, so this would be a FREE REFINANCE. If your current rate was 3.0%, your payment would be $4215. If the rate dropped ¼% to 2.75%, your new payment would be $4082, a savings of $133. But it costs you nothing…would it make sense to refinance? Absolutely, from a purely financial standpoint! Remember, different strokes for different folks! There is no one answer to when it is right to refi.
With over 34 years in business, call me to help you determine what makes sense in terms of refinancing! I do no cost refinances all day long…but again, it depends on your loan amount!
For more information, give Curt Kravitz a call: 661-705-2500.