TO  RE-FINANCE,  OR NOT  TO RE-FINANCE,  THAT  IS THE  QUESTION

The simple fact whether or not you should re-finance from your current mortgage into some other type of loan does not have a simple answer.  It depends on your expected remaining tenure in the property,  the age and type and rate of your current note, your current balance, whether or not your current note bears a prepayment penalty, and a number of other factors.   Remember this:  "Only change your loan program if the end result proves to be fully to your benefit after all costs and repercussions of the change are taken into account."  A common standard heard is: "lower your rate by 2% and remain another 2 years in the property."    It's really not that simple any more.  Assuming it ever was that simple.

Observe The Following Examples:

THE INTEREST RATE

Just because you can lower your interest rate by re-financing doesn't mean you will come out the winner.  Take this example:   ( EXAMPLE # 1 )Lets say it will cost $4,000 to re-finance and you will lower the payment $100 month while dropping the rate 3%.   If you sell your house in 2 years,  did you come out ahead?      Let's see:

( 2 years = 24 months   24 x 100 per month = 2,400    2,400 - 4,000 = <-1,600> loss ) It would appear not.

If you spend 4,000 (whether its either out of pocket or rolled into the loan) at 100 month,  it will take 40 months (100 x 40 = 4,000) to recuperate the expense.  And that doesn't even take into consideration how much interest you could earn on 4,000 over 40 months.   Don't ever lose sight of the Big Picture.

Just because its not lowered by 2% doesn't mean you didn't win either.   For example: ( EXAMPLE # 2) Lets say it costs $2,000 to re-finance and the payment is lowered $200 month even though the rate only dropped by 1%.   Did you come out ahead ?       Lets see:

( 2 years = 24 months   24 x 200 per month = 4,800   4,800 - 2,000 = 2,800 benefit)   It would appear so.

The only fact that matters is: Do you come out ahead within an acceptable time after the  costs are factored in?

TIP  # 1

"If you incur an expense to change your loan program,   you must determine how long it will take to recuperate that expense regardless of rate,  costs  and/or loan balances."    

TIP  # 2

Sometimes the lender can pay-off your current loan while giving you a new loan without any expense whatsoever.   This is called a "true" No-Cost Loan.    Don't be confused by a loan where the costs are simply rolled into the loan.   Just because you don't write a check at closing doesn't mean there aren't costs.   If you roll anything into the loan,  you lose equity!    In a true no-cost loan,  your new loan amount stays the same as your current loan balance.  

TIP # 3

If you choose to keep an escrow account (the account that collects taxes & insurance as part of your house payment) but you prefer not to write a check for all your taxes at closing,   you may be able to roll into the loan the moneys needed to set up your escrow account.   This will increase your loan balance after closing the new loan but you can pay the balance back down in only a few weeks using the refund from your old escrow account. (Assuming you have a balance in your old escrow account with your current mortgage company)   The down-side to this maneuver is that your monthly payment is set-up based on the initial loan amount.    Just because you pay the balance back down doesn't make your payment drop unless your loan is an ARM (Adjustable Rate Mortgage)

THE PAYMENT

Just because you lower the payment doesn't mean you come out ahead.   Remember Example # 1 ?

Just because the payment increases doesn't mean you lost either!    For example: ( EXAMPLE # 3 ) Lets say it costs $4,000 to refinance and your payment increases $112 per month.  Your current balance is $60,000 with a payment of $600 per month on a 30 year loan with 22 years left on it and you take out a $60,000 new 10 year loan at $712 per month.    If you sell the house in 5 years,  do you come out ahead?     Lets see:

$112 more per month x 5 years(112 x 60)  =    $6,720.00 more paid in payment

Your balance after 5 more years on your old loan would have been $ 55,803.56

Your balance after 5 years on the new loan would be $ 35,543.09

$4,000 loan costs + $6,720 higher payment =  $10,720

$20,260 lower loan balance less $10,720 = $9,540 Net Benefit  

As you can see,   even though you paid $4000 in loan costs AND increased your payment $112 per month,  you still come out way ahead.    You can't determine if you win or lose until you see the entire picture.    A lot depends on your future plans with the property.

TIP  # 4

Some borrowers are only  10  to  15 years from having their loan paid off and refinance it back onto a 30 or 40 year loan.       Why????      Because they have access to a better investment than the property.    For example: ( EXAMPLE  # 4 ) Lets say the current $42,000 loan has only 8 years left with a payment of $600 per month.    After re-financing back to a 30 year loan, the payment drops to $275 per month freeing up $325 per month to use elsewhere.    If you had access to an investment like a good stock option plan (lets say earning a 30% return) with a large company,   the house could be paid off in approximately 4 years using the same $600 per month.   $275 per month paid to the mortgage lender and $325 per month into the company plan.    $325 per month at a 30% return would grow enough to payoff the loan in less than 48 months.    A little financial planning.   Think about it.   Do you have any type of investment opportunity with your company?

There's not enough paper in the world to show every scenario of loan re-structuring to benefit the borrower.   I hope to make it clear that until every stone has been turned,  you simply cannot know if a re-finance will benefit you.   Too much depends on you and the future.   Again I suggest consulting your situation with a mortgage expert.

TIP  # 5

Be aware that sometimes you will save notably more money by shortening  your note, such as going from a 30 yr loan to a 25, 20, 15 or 10 yr new loan.  Your house payment may not drop very much, or stay about the same, or perhaps even increase some.  But the final result can end up saving you much more money.  In fact, sometimes  many times over.  Simply lowering your payment amount is often times NOT the smartest thing to do.