Is refinancing to reduce your payment the smart thing to do? The most basic analysis is to compare the savings to the costs.  For instance, if the costs are $2,500 and the savings is $100 per month, then it would take 25 months ($2,500/$100) to recover the costs.  Living in the home for more than 25 months, you will benefit from the refinance.  If you are going to live in the house for less than 25 months, then it would not benefit you to refinance.

Another level of analysis, that most do not consider, is the long term consequences of a refinance.  Every time you obtain a loan, the lender informs you of the amount of interest you will pay over the life of the loan.  For example, if you obtained a $400,000 mortgage at 4%, you would pay back $400,000 over 30 years, and $287,478.42 in interest.  Therefore, to borrow $400,000, it will cost you $687,478.42.  When you refinance, you should consider decreasing the amount of interest that would need to be paid over the life of the loan.

Even though you may be able to get a lower rate, and lower payment, you may have to pay more interest over the life of the new loan than what is remaining in the existing loan. Therefore, even though the monthly payment and interest rate is lower, you may not want to refinance in this case.

The decision on whether to refinance should be determined on a case-by-case basis.  A lower interest rate and payment may not be enough to justify a refinance.  Contact us and we can guide you through the refinance process and help determine if it is right for you.

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