What’s The Best Time For Refinance?
Posted on December 16, 2019 by Nancy Liu | Category: Real Estate
In the last article, we have mentioned the three main reasons for refinance and a lot of owners come to consult what the best time is for refinance and what factors need to be considered besides interest of refinance
Generally speaking，refinance is worth considering for owners as long as the interest is 0.25% -0.5% or above lower than the existing loan interest rate. Here we give two following examples to illustrate.
The owner A bought a house three years ago, borrowed 200,000 from the bank with the fixed interest rate of 6% for 30 years, and mortgage payment per month is $1,199, so the left loan principal is $192,168 after three years. Now, the fixed interest rate of 30 years has declined to 5.5%. If the owner refinances $ 192,168 in accordance with fixed interest rate of 5.5% for 30 years, owner A only needs to pay $1,091 per month. He/She can save $108 per month and $1296 per year, and $38,880 in total. Owner A also can save interest of $9,995 for 30 years, that is to say, he/she can save $48,875 in total through refinance.
The owner B bought a house 10 years ago, borrowed 200,000 from the bank as the same，the fixed interest rate of 30 years is 6%, the mortgage payment per month is $1,199, and after ten years the left loan principal is $167,371. Different from owner A, owner B has paid for 10 years housing load. In these 10 years, most of payment owner B paid is for the interest, so many people like owner B will think whether it is still worthwhile for refinance now. If the owner B refinances $167,371 in accordance with the fixed interest rate of 5.5% for 30 years, the owner B only needs to pay $950 per month. However, if he pays the saved money $249 per month for additional principal payments to bank instead of left to himself, in other words, owner B still pays $1,199 per month, he can save $20,072 for interest payments in total. Furthermore, owner B also can consider the fixed loan of 15 years instead of the 30 years. Generally, the fixed interest rate of 15 years is about 0.5% lower than 30 years. If the fixed interest rate of 15 years has declined to 5%, and the refinance amount of owner B is $167,371, so the repayment of loans per month for owner B is $1,324. Owner B can save $14,323 interest payments in total although he will pay $ 124 more for the monthly amount than before.
Generally speaking, it brings more advantage than disadvantage if the refinance is based on the falling of the interest, unless the owner considers to selling the house in the near future. Additionally, many banks supply the refinance of No Closing Cost, which is a favorable factor of refinance for the owners.
There is another misunderstanding for many people. They thought that the interest declared by FED have a direct relationship with the housing interest rates. They thought the housing interest rates must be fallen if the FED interest is fallen. Actually, this is untrue. The interest declared by FED is on the short-term loans between the government and banks, and the housing loans are long-term loans. These two has some relationship, but they’re not equivalent. That’s why the housing loans did not decline much (besides the short-term rate cut occurred before the last rate cut) after FED fall interest rates for several times. Instead, the housing loans have increased the interest rate. Therefore, the owners should consider how to catch the momentary chance instead of reconsideration on whether I should refinance after the rate cut. Furthermore, we do not consider the time value of money in the above examples. In short, the value of $1 today is different from it ten years later. Thus, it will have greater significance when we consider of the value of the saved money from refinance in ten or twenty years.
Owners should not wait for the lowest lending rates blindly. The right way is to count and compare the interest of refinance after the interest cut down to the interest need to pay now to see how much money they can save from refinance.
This article is only for your reference. Please do not apply mechanically to any exact cases. You are welcome to consult our attorneys at Liu & Associates, P.C. For contact information, please click here.