No Refinance After All

Argh. A refinance of my 30-year-fixed mortgage is just not in the cards for me right now. The rates did nothing but go up after I applied, so by the time I got approved, they were 6.175% for a 30-year-fixed refi (the rates are much lower if you’re a first-time buyer applying for a brand new mortgage loan, I’ve since learned). That puts my break even point at almost 26 months, which screams “not worth it!” to me. I really have no idea if I’ll own my condo for that long.

I have to learn how to track rates at the level of detail that banks and credit unions can. We hear about interest rates in the news when they drop, but they change on a daily basis and I don’t know how to track that accurately. If nothing else, I’m now approved for a refi in some capacity and will call the credit union as soon as the rates drop, pay an application fee, and lock in a good rate – if it works out that way.

Refi the Big Guy?

Drops in interest rates are about the only thing we homeowners have going for us right now. Like most, I’m wondering whether or not to refinance my 30-year, fixed-rate mortgage.

I have two mortgages, a big one with most of the balance and a small second one. Refinancing my smaller second mortgage was one of my 2007 goals, since it had a whopping 11+% interest rate. My credit union charged a $150 application fee and no other closing costs, so that refinance was a clear win.

With the recent rate drop, I’m considering refinancing the big mortgage, currently at 6.5% with a balance of $231,500. Since rates are almost a full point lower than my 6.5% refinancing seems like a good idea, but I wanted more information on how to accurately calculate that. Closing costs (if any) can cost a few thousand dollars.

How do you know if a refinance is worth it? Fortunately, Bankrate has a handy article and calculator for just this purpose. Bankrate says:

“To figure out whether it’s in your best interest to refinance, you need to calculate your break-even point. The break-even point is the time it takes to make up in monthly savings what you paid in fees. You calculate it by dividing the mortgage fees by the monthly savings. For example, let’s say you would save $100 a month by refinancing, and the closing costs would be $3,000. Your break-even point is 30 months from now: the $3,000 in fees divided by the $100 a month in savings.”

The duration of time for which you plan to inhabit your home also counts (for example, if it’s less than the 30 months given in Bankrate’s example, it may not be worth it). With my unpredictable, nomadic life, I can’t even think about any estimate approaching validity, so I’m going to ignore that part.

So what is my break even point?

I used the Bankrate calculator to run two examples, with and without closing costs:

Example One: No Closing Costs! Happy Land!
Here’s the example with only a $150 application fee, like last time:
New monthly payment: $1329.77
Monthly savings: $207.23
Difference in interest: $56,160.13
Total cost: $150
Months to recoup costs: 0.7

Example Two: Closing Costs Like When I Bought
Even with closing costs of about $3,000 (which is what I would have paid, had my wonderful real estate attorney not made the developer pay instead), the break-even point still isn’t far away:
New monthly payment: $1329.77
Monthly savings: $207.23
Difference in interest: $56,160.13
Total cost: $3,000
Months to recoup costs: 14.5

Looks like the refinance is well worth it even if I only own my condo for a little more than one more year. Feb. 11 is the day I can get my free annual credit report again. Looks like it’s time to get the ducks in a row again, and continue to wonder how long I should wait to see if interest rates drop again…