Should We Refinance our Mortgage

I'm including an information sheet that describes some behind-the-scenes actions by Freddie Mac and Fannie Mae provided by Cherie Kesti. You might find this interesting.

But the question remains: "how much money can we save if we refinance now?" You need to know your monthly payment (principal and interest only) and the cost of money. What's that?

OK, here are figures for the cost of borrowing money you can use. At 6% the cost to borrow $1,000 for 30 years is $6.00; at 5% the cost is $5.37; at 4.5% the cost is $5.07; at 6.5% it's $6.32; and at 7% the cost is $6.65.

For example, the prinicipal and interest only cost of borrowing $100,000 at 6% is $600.00 (100 X $6.00). Rates today are around 5% so the principal and interest cost to borrow $100,000 at 5% is $537.00 (100 X $5.37).

There will be costs to refinance and you won't know those until you've spoken with a loan officer. For argument's sake, let's say the cost to refinance is $5,000 and the interest rate of your mortgage is 6% and you want to refinance $100,000. Therefore, the principal and interest portion of your monthly payment is $600.00. If the rate on your refinance is 5%, then your monthly principal and interest payment portion would be $537.00, saving you $63.00 per month in principal and interest or $756.00 per year.

Lastly, divide the refinance cost ($5,000) by your annual savings ($756) to determine the pay-back period. In our example this would be a bit over six years. So if you were planning to stay in your home for the next six years, it may make good financial sense to refinance.

If you're considering refinancing, please consult with your accountant who will be able to help confirm your math and recommend whether this may be a good decision in the overall scheme of your financial situation.