As you might expect, there is no simple answer when deciding whether or not to refinance a home loan. When I did my last refinance, it was on an investment property in San Antonio, on which I was able to lower my monthly payment $352 per month. This was a no-brainer. Or was it? The cost to do the refinance was over $3,000, and I took a new 30-year loan to replace the existing loan on which I had already made 48 payments. But, I was able to eliminate the private mortgage insurance from the original loan because of a high loan-to-value ratio on the new loan. Also, I was able to add the entire amount of the closing costs onto the new loan.
My thinking at the time was that I fully intend to keep this home for at least 10 years. With this in mind, I applied an amortization schedule to the original loan, which would have been paid on for 14 years after the 10 year period, and compared it to the terms of the refinance. Because of the lower interest rate, the refinanced loan plus closing costs, which would have been paid on for only 10 years, would actually have a slightly lower loan balance than the original loan after the 10 year period. Adding to that the savings of $352 per month, and I was confident the decision to refinance was correct for my situation.
Another factor that contributed to my decision was my confidence in the San Antonio, TX housing market, which has easily weathered the economic downturn over the past few years. A recent article in Forbes Magazine listed San Antonio as the fifth best city in the country in which to purchase a home.
The above factor are not all-inclusive, but if you are considering refinancing a loan, they should serve to get you started on making a decision. If the monthly payment is not a factor, you should also consider a shorter term mortgage. Had I done a 15 year loan on my refinance, the monthly payment would have been only dollars different than what existed on the original loan. Alternatively, if you don't want to commit to the higher payment on a continuous basis, you can add additional principal payments onto the 30 year loan payment and easily reduce the payoff to 20 years.
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