When Refinancing Hurts

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filed under: Refinancing
If you fall short of the break-even point, refinancing your mortgage costs you money. In that case, it may not be a good idea.
Let's say you bought your house five years ago, borrowing $125,000 at a 10% fixed rate for 30 years. Mortgage loan rates have since dropped and you're thinking of refinancing in order to cut your monthly P+I payments, which are currently $1,097. Your current loan balance is $120,718.
Your lender qualifies you for an 8% interest rate, which cuts your monthly payment to $932, from the table below:
Years LeftLoan Balance9%8%7%
25$120,718$1,013$932$853
20$113,673$1,023$951$881
15$102,083$1,035$976$918
10$83,012$1,052$1,007$964

Not only do you save $165 ($1,097 - $932) in monthly payments, you also can invest those savings at some saving interest rate, which you estimate to be 6%. You estimate that your totalclosing costs will be $5,000.
There's an additional hitch -- you expect a job transfer to another city within a year, forcing you to sell your home. You will want to run the numbers to determine whether this scenario will get you to the break-even point. Depending on the probability of your relocation, you may wish to reconsider refinancing for now.
2008-07-21 15:27:59
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