If your rate is above 4.5%

I’ve been hearing the radio ads just like everyone else, and our favorite breathless loan cheerleader has lately been urging you to call him “if your rate is higher than 4.5%”. I’m sure he would love to refinance you over and over again without any regard to if it makes sense for you.

Lets say you currently have a mortgage for $180k at 5.5% interest. Your principal and interest payment is $1,078. And now you really think that you are being foolishly ripped off for paying more than 4.5% on this loan. Lets also say that your credit score is 685. So now, in order to achieve this magical interest rate, you will need to pay a load of mortgage processing fees, an appraisal fee, title fees, plus 2% in points to cover the premium associated with a 685 credit score. Lender and title fees totaling $7,000. This is what you will pay in order to achieve a monthly savings of $115. The easy math is to divide the monthly savings into the upfront costs and calculate how many months it will take to pay for itself: $7.000 / 115 = 60 months or 5 years to break even. There are also some additional tax implications to refinancing, for instance, when you reduce your interest rate you reduce your tax deduct-ability.

Or, if the loan that is being paid off was a refinance mortgage, or a purchase mortgage there are some different things that come into play (Paying off a previous refinance mortgage can create a “recapture” of a prior claim), I think upon further analysis that the actual recapture would be longer than 60 months.

But if this borrower was convinced that they would be in the property for at least that period of time, and/or had a PLAN for using that added cash flow to further benefit them beyond just spending it. A case could be made for doing this refinance. Thankfully there is a new standard form that gets included with refinance mortgages called a “net tangible benefit” sheet. It forces loan originators to prove that the borrower is benefiting from the new mortgage.

If you would like to dig into YOUR personal finance situation more deeply to determine if a refinance would be worthwhile, I would love to make some time to figure it out with you.

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