Because homeowners refinance for a variety of reasons, there isn't one answer to this question. You may wish to obtain a lower interest rate and likely, a lower monthly payment. Perhaps you want to refinance to reduce the term of your current mortgage or convert a fixed-rate mortgage to an adjustable rate, or vice-versa. Finally, you may want to exchange the equity in your home for cash to make home improvements, consolidate debt or to pay for college tuition.

Whatever your reason, we believe a thorough review of your needs and your current mortgage is required. Part of this process includes considering the following information:

1. The interest rate and term of the existing mortgage.
2. The current interest rates available.
3. The cost to refinance.
4. The length of time you plan to stay in the home.
5. Your current income and credit status.
6. Any pre-payment penalties on your current mortgage.

Refinancing is simply the process of taking out a new mortgage, and using the money obtained to pay and close your current mortgage. Refinancing may include many of the same steps that were involved in applying for and obtaining your existing mortgage. This includes having to pay closing costs and perhaps establishing a new escrow account. The balance of your existing escrow account is reimbursed to you after the closing of your new mortgage.

When refinancing, there are basically two options. One option is a rate & term refinance. You will likely choose this option if you wish to lower your interest rate, monthly payment or to change term of your loan. When you consolidate debt (credit cards, car loans, etc.) or exchange equity from you home it is called a cash-out refinance.

In the case of a rate & term refinance, simply obtaining a lower rate may not necessarily provide a financial benefit. While a monthly savings will likely be realized, you must consider the cost to obtain that savings.

For example, assume you want to refinance an existing mortgage with a balance of $113,112. The current monthly principal and interest payment is $830.06 (based on 7.5% for 30 years with an original mortgage of $120,000).

You now have the opportunity to refinance the existing balance at 7.25% for 30 years. The closing costs for this will be approximately $1200, in addition to prepaid interest and the cost to reestablish your escrow account. The lower interest rate and the lower loan amount will reduce the monthly principal and interest payment to $771.69, saving you $58.37 per month!

Before refinancing under this example however, you should consider how long you intend to stay in the home. This is important as it relates to the "break-even" point. Let's assume you plan to sell the home in 18 months. As indicated in the example above, you will realize a monthly savings of $58.37 by refinancing. The approximate cost to refinance in this example is $1200 (your costs may be higher or lower depending on your situation). To calculate the break-even point, divide the monthly savings into the closing costs. In our example, the break-even point is 20.5 months. Given your plan to sell the home within 18 months, refinancing simply to lower your rate may not provide a benefit.

Now let's review the same example but consider that your existing mortgage includes private mortgage insurance and that payment is $52 per month in addition to the principal and interest payment of $830.06. Let's assume that the refinance mortgage amount is now 80% percent (or less) of your homes value. This would eliminate the requirement of private mortgage insurance thereby saving you $110.37 per month. This savings reduces the break-even point to 10.9 months! Refinancing may now be a prudent financial decision.

Please note, it is not necessary to refinance a mortgage to eliminate private mortgage insurance. If you believe you have reduced your loan-to-value to 80% or less, contact your lender regarding their policy to remove private mortgage insurance from your loan.

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Sparta, MI 49345