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How do you determine if refinancing is a good plan on the 30 yr fixed FHA that is 5 years old?

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May 25 2010 - Atlanta
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Answers (4)

Great question!

Take a minute and answer these questions

1. What is your loan amount and type, date closed, and current interest rate? 

2. What is your credit score ?

3. What is current value of home ? Zillowit

3. Are you looking to shorten your term or lower your payment?

4. Post this to Zillow and get your answer!

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May 28 2010
Great question and one not enough borrowers ask and not enough loan officers know how to truly answer.  Just saying take the payment savings divided by the closing costs answers how long your recapture time period for the closing costs is, but does not answer definitively whether the refinance transaction provides a financial benefit in the long run.  The following steps can be done by any competent loan officer in 3 - 5 minutes while you're on the phone.   They sound more complicated than they really are.   These are mortgages, not rocket science so call someone in your area and ask them to do the following:
1) Open a Truth-in-Lending (TIL) Disclosure form in their loan origination software. Input your original loan terms (original loan amount, interest rate, and first payment date).  Hit calculate and the TIL will tell you what was the total finance charge or interest scheduled to be paid on that loan if you made all of the payments.
2) Open an amortization schedule in their loan origination software and choose the cumulative option that month by month totals how much principal and interest you've paid to date.
3) Scroll down to the current mortgage balance on the cumulative amortization schedule.  Look and see how much interest has been paid from inception to the current payment month.
4) Subtract the total interest paid to date from the total interest scheduled to be paid and the resulting number is how much interest you have left to pay if you do nothing and pay the current loan through to maturity.
5) Input the offered new refinance loan terms into the TIL and calculate to see how much total interest is scheduled to be paid on the new loan.  Add the one time closing costs to the new loan total scheduled interest.
6) The new loan total scheduled interest plus the one time closing costs of the refinance transaction must be less than the interest remaining to be paid on the existing loan if you do nothing.   If it is not, it does not matter that you're saving money every month in a lower payment - you're paying more interest on the new loan than doing nothing.

If the new loan total interest expense plus one time closing costs is enough less than the interest remaining to be paid on the existing loan and you plan on staying in the house longer than the minimal recapture time period of the closing costs then it makes sense to refinance.

If you're really interested in saving money over the long term and you don't have to have the lower monthly payment then you should additionally ask your loan officer to do the calculation in the TIL to show you what the total interest expense on the new loan would be if you kept making the same payment as you currently make on the new loan.  You are then amortizing additional principal each month with no impact on your budget since you are already making that payment anyway.  The interest savings over the life of the loan can be enormous.

No part of the above is complicated and any competent loan officer should be able to follow those steps if they don't know how to really determine if a refinance is providing  you a financial benefit.   If they are truly competent they'll already know how to do this.  If they don't, you may want to look around and find a loan officer that really is a competent pro who will give you straight answers and tell you when the proposed transaction provides you no benefit instead of trying to sell you something.
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May 26 2010
First, see what your monthly payment is.  Then, ask a mortgage consultant what your new monthly payment would be.  The difference will be your monthly savings.  Then, figure out what the cost of refinancing is.  If, for example, your savings are $100/month, and it costs $2500 in origination costs, appraisal, etc., to refi, then it will take you 25 months to start saving money.  If you are planning on staying 3 years, probably not worth it.  If you are keeping the house for 30 years and you could save $100/month, that is probably $2500 worth spending.
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May 26 2010
Get with a lender or broker that will show you several options, then you can see what is best for you.Refinancing into another FHA loan with a 30 or 25 year term is just 1 option, there may be better options depending on your credit/income/house value. Do you know what homes are selling for around you? What is your current interest rate?  
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May 26 2010
 
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