When Do You Refinance?

Everyone wants the lowest rate and the lowest payment, but at what cost?  Despite what you may be told, there is a cost to refinance.  When you refinance as when you get a loan to purchase a home there are two types of closing costs:

  • Non-Recurring Closing Costs - These are the closing costs that you pay once at the time of closing.  Things like escrow fees, title insurance costs, recording fees, appraisal, credit report, etc.
  • Recurring Closing Costs - These are costs that happen over and over again.  These are property taxes, insurance and interest.  These costs are costs you will pay whether or not you actually refinance.

No Cash-Out Refiances (Rate and Term Refinances)

A no cash-out refinance (or "rate and term" refinance) is done to better your financial position.  It is done to lower your interest rate and/or your payment.  It can also be done to shorten the time of your mortgage obligation (i.e., from 30 years to 15 years) or go from an adjustable rate/interest-only/balloon payment loan to a standard fixed-rate loan..  

The key to a no cash-out refinance is how long it takes to recover the non-recurring closing costs.  Generally speaking, on a 30-year to 30-year refinance you would take the non-recurring cost total and divide it by the monthly payment savings to determine how many months it would take for recovery.  Other types of no cash-out refinances take additional calculations.

Cash-Out Refinances

A cash-out refinance is done to obtain cash for a specific purpose such as consolidating bills, cash for improving your home, cash for investment, schooling, etc.  In a cash-out refinance it is not about recovering the costs of the refinance, it is about finding the best financing at the best price.

To find out all of your refinance options, answer a few simple questions here.