| You've probably found yourself at one time or another | | | | after 20 years. Subtracting this from the $227,702.37 |
| wondering whether it was a good time or not to | | | | we know you still owe on your CURRENT mortgage |
| refinance the house. You figure you can consolidate | | | | results in a loss of $74,744.43 after 20 years, IF you |
| some bills, free up some monthly cash, maybe take | | | | take this refinance. |
| some cash out...you know...to fix up the house...possibly | | | | But as you remember from our prior debt consolidation |
| get that new flat screen TV you've been talking | | | | example, we still have to account for the $250 |
| about...and then maybe take a vacation with what's | | | | monthly savings over those 20 years as well. So 240 |
| left. Sounds good. It helps the economy, and hopefully it | | | | months, or 20 years, multiplied by $250 per month in |
| helps you too. | | | | savings equals $60,000. When we combine that with |
| Like many people, you have probably heard of, or hold | | | | the loss of $74,744.43 from our TIL costs calculation, it |
| to, a rule of thumb regarding when to refinance that | | | | results in a total loss of $14,744.43 after 20 years. |
| appears to have served others, or even yourself, well. I | | | | Well, so much for the $200/month & 5 Year Rule |
| say "appears" precisely because things are not | | | | being bulletproof. What if you get out of the home or |
| always what they appear to be. And when it comes | | | | mortgage early in the term, do you come out ahead |
| to when to refinance rules of thumb, you must beware | | | | then? Sadly, no. In this scenario, the rule FAILS |
| of simplistic rules. A refinance is likely the LARGEST | | | | COMPLETELY. The loss after 20 years is the |
| financial transaction you may ever make and two of | | | | HIGHEST this trend line ever climbs. It is climbing, but |
| the most widely used rules of thumb don't consider the | | | | climbing only halfway out of a hole still leaves you in |
| big picture. Simple is great, except when it's SIMPLY | | | | the hole. After five years you've lost $20,103.16 and |
| WRONG. | | | | after 15 years you've lost $19,309.81. |
| When To Refinance Rule Of Thumb Myth #1 | | | | In this scenario the $200/month & 5 Year Rule |
| So what are these two when to refinance rule of | | | | would cost you thousands no matter what you did. |
| thumb myths, and how is it they can appear to be | | | | Like the 2% Rule, I know there are scenarios where |
| giving you a good deal, while in many cases actually | | | | this rule can be applied, and it will be financially |
| costing you thousands? Well the first myth is what | | | | beneficial, but blindly relying upon either of these rules |
| many people call the 2% Rule. This rule states that you | | | | as a when to refinance rule of thumb is a crap-shoot. |
| should never refinance into a mortgage that doesn't | | | | How do you do when you're in Vegas? "Do you feel |
| reduce your interest rate by at least 2%. And if you | | | | lucky...punk? Well DO ya...?" |
| can refinance into a mortgage with a 2% or greater | | | | The banks, like casinos, have all run their numbers. |
| decrease in interest rate, then the monthly savings will | | | | They know the statistics, they know the odds. If you're |
| add up to long term savings over the life of the new | | | | determined to come out on top, then you must RUN |
| loan. In some cases this can be true and in many | | | | THE NUMBERS. |
| others it is not. The problem with this rule, as you will | | | | So as a when to refinance rule of thumb, do the 2% |
| see shortly, is that it is blind to all other loan factors | | | | Rule or the $200/month & 5 Year Rule work? |
| besides rate. Let's take a look at some actual figures | | | | Sometimes Yes, and sometimes No. Do they capture |
| and put this rule to the test. | | | | all of the complexities related to refinance costs? |
| (Note: The figures and calculations below will be | | | | Certainly not. Do they serve as reliable when to |
| explained for those of you that want to learn to | | | | refinance rules of thumb to use as a basis for your |
| calculate refinance costs yourself, as well as for those | | | | next refinance decision? That's something only you |
| of you that may not trust my math...LOL. I apologize if I | | | | can answer for yourself, but as for myself, I trust |
| get too detailed, but I really want YOU to know for | | | | numbers and I am always going to DO THE MATH. |
| YOURSELF if you're saving money, rather than relying | | | | To me, a rule that works sometimes is UNRELIABLE, |
| on a salesman's opinion. This is information | | | | and essentially not a rule at all, it's a myth. |
| EVERYONE MUST HAVE. As you read this article | | | | The Best & Only When To Refinance Rule Of |
| you will learn how to save thousands in the refinance | | | | Thumb |
| market, so it's well worth your time to read each | | | | DO THE MATH. DO THE MATH. DO THE MATH. |
| section all the way to the end. Also please note that | | | | When it comes to home refinancing, you really need to |
| the Mortgage Payment Calculator mentioned below | | | | see the process for what it is...possibly the LARGEST |
| can be found by following the link found at the end of | | | | financial decision affecting your wealth that you will |
| this article. It is not needed to follow along with this | | | | ever make. In one of the above examples the savings |
| article, unless you wish to double-check the | | | | over 15 years exceeded $35,000. That's an EXTRA |
| calculations.) | | | | YEAR'S SALARY for many of us, 2080 hours of |
| For our example, let's assume 15 years ago you took | | | | wages for which you didn't have to do any work. In |
| out a fixed rate home mortgage for $195,000 at 8% | | | | another example, the losses were twice that over 30 |
| for 30 years. Your CURRENT balance on the loan is | | | | years. Ouch! The only way you can be sure that |
| $149,720.90. You have 15 years left to go and the | | | | you're saving and not losing is to DO THE MATH. |
| payment on this mortgage is $1,430.85 per month. If | | | | You've seen me throwing out all of these trend figures |
| you input these figures into my Mortgage Payment | | | | for different points in time, without explanation for how |
| Calculator you'll see that the TOTAL amount of | | | | I derived them. Now I'm going to show you how to |
| money you will pay in principal and interest over the life | | | | calculate your refinance savings or losses for |
| of this loan is $515,092.47. (This total cost is disclosed | | | | YOURSELF. |
| to you on a lender's Truth-in-Lending Statement (TIL), | | | | There are really only five factors involved in comparing |
| and by law this statement must be provided to you by | | | | the costs of a CURRENT loan to a REFINANCE loan |
| the lender within 3 business days of application.) | | | | for any point in time. They are: |
| Over 15 years you've made 180 payments of | | | | 1-Monthly Payments Difference Cost/Savings to date |
| $1,430.85 for a total of $257,553.00 already paid. If we | | | | 2-Debt Consolidation Savings to date |
| subtract what you've already paid from the total | | | | 3-Remaining Balances Difference |
| obligation of $515,092.47 we find that you still owe | | | | 4-Cost of Refinance (Points & Fees) |
| $257,539.47 for the final 15 years. This number serves | | | | 5-Term Difference Savings to date |
| as a good starting point for comparing different loan | | | | Our FIRST STEP is to subtract the CURRENT |
| offers, because you should have your Truth-in-Lending | | | | Monthly Payment from the NEW Monthly Payment. |
| (TIL) Statement early (within 3 days) and it will instantly | | | | Example: $1265.06 (CMP) - $1260.21 (NMP) = $4.85 |
| show if the new loan is substantially more costly than | | | | The result is a gain of $4.85 per month. If ever this |
| your current mortgage. But this is NOT the final word | | | | calculation results in a loss, be sure the number has a |
| as there are other considerations that vastly affect | | | | negative sign(-). |
| cost and savings. We'll get to that shortly, but first let's | | | | The NEXT STEP is to add any Debt Consolidation |
| continue with our example. | | | | Savings to the result of the last calculation. |
| A lender has offered you a $150,000 fixed rate | | | | (Remember, if the last calculation resulted in a loss |
| mortgage at 6% for 30 years with 2 discount points | | | | you're essentially subtracting here, since you're adding |
| down and $2500 in closing and processing fees. (A | | | | a negative number.) |
| single discount point is equal to 1% of the loan amount.) | | | | Example: $4.85 (MP Savings) + $250 (DC Savings) = |
| Like many people you may decide to finance the | | | | $254.85 |
| points and fees into the loan. For this example we will | | | | Now we need to know the point in time you wish to |
| finance these costs, so our total NEW loan amount will | | | | examine. Let's look at five years out. So that is a total |
| actually be $155,500, but still at 6% and still for 30 | | | | of 60 months from now. Since in this example you're |
| years, and your monthly payment will be $932.31. Using | | | | saving $254.85 every month that's a total savings of |
| either my Mortgage Payment Calculator or your TIL | | | | $15,291.00. Write this number down in a column. |
| we can see that the total cost of this new loan is | | | | The NEXT STEP is to determine the Remaining |
| $335,622.63. | | | | Balances for BOTH loans in five years. Using my |
| So is this refinance going to save you money? It does | | | | Mortgage Payment Calculator will help make this |
| follow the 2% Rule. The lower payment is also | | | | easier. In this example, the beginning loan amount on |
| SAVING you $498.54 every month, but the TIL shows | | | | the CURRENT mortgage was $208,000 at 6% for 30 |
| it COSTS $78,083.16 more to take this loan. So what's | | | | years with zero points and $3000 in closing costs |
| the deal? Will this loan save you money, or cost you | | | | which were financed, and you've been in the mortgage |
| money? The correct answer is...IT DEPENDS. | | | | for 15 years. If you input these figures you'll see that |
| As it happens, one of the most determinate factors | | | | after 15 years in the mortgage, your CURRENT loan |
| affecting your wallet in a refinance is TIME. And I don't | | | | balance is $149,910.62. The amortization table shows |
| just mean the number of years on your mortgage | | | | that in five more years (20 years into the mortgage) |
| term. Regarding our example above, I specifically mean | | | | your Remaining Balance will be $113,943.69. Now let's |
| the length of time you plan on keeping your home or | | | | find out where the NEW loan will be in five years. |
| mortgage. This is one of those factors that the 2% | | | | For this example, input a loan amount of $170,000 at |
| Rule fails to consider. So why is that so important? It's | | | | 6% for 20 years. It also has 2 points and $2500 in |
| because any savings or costs in a refinance are | | | | closing costs, which are being input ONLY because |
| realized over TIME. The bottom line is constantly | | | | they are being financed. (If you are paying points and |
| changing as time progresses, you could be saving | | | | fees out of pocket, DO NOT include them in this |
| more and more, or losing more and more. | | | | calculator input.) Hit the Calculate button and you'll see |
| It is true that the above refinance would cost you | | | | that after five years your Remaining Balance is |
| $78,083.16, but that's only after 30 years. However, | | | | $149,337.85. Subtract this NEW Remaining Balance |
| after only five years, taking the refinance has actually | | | | from the CURRENT Remaining Balance. |
| SAVED you $3,140.18. If you moved or paid off your | | | | Example: $113,943.69 (CRB) - $149,337.85 (NRB) = |
| mortgage after five years you'd be ahead of the | | | | -$35,394.16* *Notice the result has a negative sign(-). |
| game. At 10 years you'd still be ahead by $253.16, at 15 | | | | Add this negative number to the column with the |
| years you've lost $20,741.16 and at 20 years you've | | | | $15,291.00. When you total these numbers it shows a |
| lost $50,172.85. I'm sure you can see the downward | | | | TOTAL LOSS of -$20,103.16 after five years. In this |
| trend as time moves on. The monthly payment | | | | example, this is the FINAL TOTAL after five years. |
| savings has the most benefit early on in the loan, while | | | | The last two of the five factors don't apply to this |
| the slower decline of the principal balance | | | | example. The Closing Costs don't need to be |
| progressively nullifies that benefit as time goes | | | | deducted here because they were financed, and their |
| forward. The impact is substantial, yet the 2% Rule | | | | expense is accounted for in the Remaining Balance on |
| doesn't consider either of these two factors. | | | | the NEW loan. If we had not financed the points and |
| Let's give the 2% Rule another test run as a when to | | | | fees, then you would determine their total cost and |
| refinance rule of thumb. We'll use the same scenario | | | | write it in the column as a negative number, totaling it |
| as above, but we'll make it a debt consolidation | | | | with the other numbers in the column in order to |
| refinance that you're considering. This refinance will | | | | account for the cost. And the last factor, Term |
| pay off $20,000 in credit card and other consumer | | | | Difference Savings, doesn't apply because we are |
| debt, freeing up the $250 you had been sending in for | | | | only looking five years ahead. This factor has no |
| monthly payments. So in this case the loan amount will | | | | effect until the term on the CURRENT mortgage has |
| be $175,900. We're still financing the 2 points and | | | | expired. |
| closing fees and the rate is still 6%. But now let's make | | | | To show you how to account for this last factor, let's |
| the TERM for 15 years. This shorter term makes the | | | | compare the same two loans but look 20 years |
| monthly payment $1,484.35 which is actually in increase | | | | ahead, five years after your CURRENT mortgage has |
| of $53.50 over your present payment, but when | | | | expired. The monthly savings of $254.85 multiplied by |
| combined with the debt consolidation savings of $250, | | | | 240 months, or 20 years, is $61,164.00. Write this in a |
| nets you a TOTAL monthly savings of $196.50 every | | | | new column, since it's a new point in time. |
| month. Using either my Mortgage Payment Calculator | | | | Now the Remaining Balances Difference after 20 |
| or the TIL you will see the total cost of this loan is | | | | years is actually $0.00. The CURRENT loan only had |
| $267,181.30. Subtracting this from the $257,539.47 we | | | | 15 years to go and the NEW loan was only for 20 |
| know you still owe on your current mortgage results in | | | | years, so a zero balance minus a zero balance equals |
| a LOSS of $9,641.83, after 15 years, IF you take this | | | | zero. Write a zero in the column. |
| refinance. | | | | The Closing Costs were financed and therefore |
| But as I mentioned earlier, this is not the final word as | | | | accounted for, so the only remaining factor is the |
| there are other considerations. Like what? Well, like the | | | | Term Differences Savings. Since your current |
| $250 you're saving every month on those paid off | | | | mortgage expires in 15 years, but the new mortgage is |
| debts. We still have to account for that. The | | | | for 20 years, this is the money you would NOT have |
| Truth-in-Lending statement only shows costs related to | | | | to pay for the final five years if you STAY in your |
| mortgage payments and loan balances over time. | | | | CURRENT mortgage. Your CURRENT monthly |
| Now since our CURRENT loan has 15 years left and | | | | payment is $1265.06 and NOT paying that for 60 |
| our NEW loan is for 15 years, the loan balances would | | | | months would save you $75,903.60. This number is |
| reach zero at the same time, so after 15 years the | | | | also written in the column, but as a negative since this |
| costs related to loan balances are the same. This | | | | is a loss you realize by taking this refinance. Total up |
| means the only cost shown in our TIL comparison | | | | the $61,164.00 and the $0.00 and the -$75,903.60 and |
| above comes from the change in monthly payment. | | | | you'll get a FINAL TOTAL LOSS of -$14,739.60 after |
| That's why if you multiply the loss of $53.50 over 180 | | | | 20 years or the life of the loan. |
| months (15 years) the resulting total loss of $9,630 is | | | | You can even double check this by using the TIL cost |
| basically IDENTICAL to the loss of $9,641.83 shown in | | | | calculation as demonstrated at the beginning of this |
| our TIL comparison. (While it's a negligible amount, the | | | | article. |
| reason for the difference is that the FINAL payment | | | | Example: $227,702.38 (Remaining Cost) - $302,446.81 |
| on a loan is almost always lower than the NORMAL | | | | (New Cost) = -$74,744.43 |
| monthly payment, where our calculation assumes all | | | | This example's total loss is -$74,744.43 after 20 years. |
| 180 payments were the same.) | | | | We already know the TIL can't account for Debt |
| Now, back to accounting for the other | | | | Consolidation Savings, so in order to make a true |
| consideration--the debt consolidation savings. When | | | | comparison we need to account for those savings. |
| we multiply the monthly savings of $250 over 180 | | | | Now $250 a month over 240 months, or 20 years, is |
| months, or 15 years, the resulting total is $45,000.00. | | | | $60,000.00. When we add that $60,000.00 Debt |
| When combined with the loss of $9,641.83 we find | | | | Consolidation Savings to the TIL costs calculation result |
| you've actually saved $35,358.17 after 15 years! | | | | in the example above, the total result is a loss of |
| So the 2% Rule is in effect, and we can demonstrate | | | | -$14,744.43--nearly identical to the FINAL TOTAL |
| some pretty substantial savings over the life of the | | | | LOSS of -$14,739.60 we were double checking. This is |
| loan. Does that mean that using the 2% Rule in this | | | | proof of the accuracy of this method and I hope you |
| case will definitely save you money? Again...IT | | | | can see it's value. |
| DEPENDS. If you moved or paid off this mortgage | | | | I do admit, all this math can become a bit tedious, |
| after five years you've actually lost $3,982.92. | | | | especially when looking at several different points in |
| This is because the difference in loan balances (what | | | | time for several different offers. If your interested in a |
| you would have to pay-off) is greater early in the loan. | | | | great alternative to doing all of this math manually, you |
| And the monthly payment savings can only show | | | | should check out the Trend Master Refinance |
| benefit once the steadily accelerating decline in the | | | | Calculation Tool. It will do all of this math in a flash and |
| principal balance of the NEW loan has been given time | | | | show you in a user friendly way, exactly how your |
| to catch up to where the balance of the OLD loan | | | | mortgage will affect you. It's really a fantastic tool. You |
| would be at that time. (This will make more sense | | | | can find out more by following the link provided below. |
| when I show you how to calculate this for yourself | | | | Advice From A Former Mortgage Professional |
| shortly.) | | | | I STRONGLY ENCOURAGE you to create tables of |
| There is an upward trend in savings as time moves | | | | each of your loan comparisons over several different |
| on, going from the negative, upward into the positive. | | | | points in time. Seeing the trends visually can be truly |
| So for this refinance to save you money, you must | | | | enlightening. Keep in mind the length of time you plan |
| STAY in your mortgage until that trend line flips from | | | | on staying in the home. I also highly, HIGHLY |
| the negative side of losses to the positive side of | | | | recommend you get multiple, read many, quotes from |
| savings. But again, this information fails to be | | | | different lenders. A "Good Deal" means not only |
| considered when using the 2% Rule as a when to | | | | putting yourself in a better financial position, but also |
| refinance rule of thumb. Clearly, relying on the 2% Rule | | | | getting the best value in the current market. |
| as a when to refinance rule of thumb is no guarantee | | | | THINK about that last sentence for a minute. |
| of savings. | | | | If a 2% interest decrease saves you $300 a month |
| When To Refinance Rule Of Thumb Myth #2 | | | | and $10,000 long term, is it a "Good Deal?" What if |
| I promised you two when to refinance rule of thumb | | | | another lender was offering a 3% decrease at that |
| myths and I won't disappoint. The second myth that | | | | time and it saved you $600 a month and $40,000 long |
| could cost you thousands of dollars is what I will refer | | | | term? Is the first offer still a "Good Deal" or a "Not So |
| to as, for brevity's sake, the $200/month & 5 | | | | Good Deal?" |
| Year Rule. This rule states that if you can refinance | | | | Look at it another way, if you bought a $60,000 car |
| into a mortgage that saves you at least $200 every | | | | for $50,000, and then saw it somewhere else for |
| month AND doesn't add more than five years to the | | | | $35,000, regardless of how much money you saved, |
| remaining term on your current mortgage, then it will | | | | you'd still probably feel cheated. That's because deep |
| save you money in the long run. The problem with the | | | | down you know you got a deal, but NOT a "Good |
| $200/month & 5 Year Rule as a when to | | | | Deal." |
| refinance rule of thumb is that, like the 2% Rule, it is | | | | You should always explore the market. Multiple offers |
| blind to many of the same loan factors such as the | | | | help give ALL of the offers a sense of scale and |
| impact of time and loan balances. But where the 2% | | | | value. Utilize the methods I have given you here. Use |
| Rule was blind to monthly savings, the $200/month | | | | my Mortgage Payment Calculator to assist you. |
| & 5 Year Rule is instead blind to interest rate. | | | | Always DO THE MATH and look at the trends over |
| Let's check out some actual figures and see if this rule | | | | time. Information is power. |
| fares any better than the 2% Rule. | | | | Use the tools that work and throw out the tools that |
| In this example, let's assume 15 years ago you took | | | | don't. Oversimplified when to refinance rules of thumb |
| out a fixed rate home mortgage for $211,000 at 6% | | | | are tools that don't work. The Trend Master Refinance |
| for 30 years. Your CURRENT balance on the loan is | | | | Calculation Tool is a tool that does work. Follow the link |
| $149,910.62. You have 15 years left to go and the | | | | below to learn more about what it can do for you. You |
| payment on this mortgage is $1,265.06 per month. If | | | | owe it to your pocketbook to at least check it out. |
| you input these figures into my Mortgage Payment | | | | Another suggestion is to contact actual lenders. You're |
| Calculator you'll see that the total amount of money | | | | not obligated to anything until you sign at closing and it |
| you will pay in principal and interest over the life of this | | | | costs nothing to get a quote. Get the |
| loan is $455,413.17. Over the last 15 years, the 180 | | | | Good-Faith-Estimate and the Truth-in-Lending |
| payments of $1,265.06 you've made total $227,710.80. | | | | statements from each lender. They are REQUIRED |
| Subtract this from the total cost of $455,413.17 and we | | | | BY LAW to provide them within 3 business days of |
| see you still owe $227,702.37 over the next 15 years. | | | | application. Also ask for an amortization schedule as |
| As before, this becomes our starting point for | | | | well, since it will show you the loan balances over time. |
| comparison. | | | | A final word. There are some fantastic online services |
| The lender comes back with a debt consolidation loan | | | | that take most of the work out of mortgage shopping |
| offer in order to provide the $200 monthly savings. | | | | today. You can fill out just one online application and |
| Again we'll assume you're paying off $20,000 in credit | | | | get back multiple offers very quickly. At that point you |
| card and other consumer debt, which frees up $250 | | | | can apply my methods for each offer over several |
| each month. So the offer is a fixed rate mortgage of | | | | points in time and really see what action is best for |
| $175,900 at 6% which includes the 2 discount points | | | | you. And you should REPEAT this process until you |
| and closing fees which are being financed. In order to | | | | are satisfied you have a "Good Deal." |
| get the $200 monthly savings, it is necessary to | | | | Remember, it's not you against the banks, it's the |
| extend the TERM to 20 years, and this makes your | | | | banks against each other! That's your LEVERAGE! |
| monthly payment $1,260.21. This is a monthly savings | | | | Use it! |
| of $4.85 over your PRESENT payment and you're | | | | Pass this information on to everyone you know. If we |
| also saving $250 per month due to debt consolidation | | | | all know how to make informed decisions and spend |
| for a total savings of $254.85 each month. Using either | | | | money wisely, we add stability to our economy and to |
| my Mortgage Payment Calculator or your TIL we can | | | | our future. |
| see that the total cost of this NEW loan is $302,446.81 | | | | |