How To Re-Finance With An Eye Toward Future Rates

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In fact, current levels show we haven't been near these rates since a brief period late last January and early February. And for those of you who waited, and waited and waited for rates to drop again, well, this might just be the time.

But how do you pick the right interest rate?

There's no perfect answer, but by comparing interest rates to the required discount points and origination fees it becomes a little easier to decide which combination of points and fees are right for you.

Personally, I've never been a big fan of paying points or origination fees during a refinance, or for any loan for that matter. Especially in this recent cycle.

Why?

Usually, the drop in lower payment isn't sufficient to recover the closing costs associated in a short enough period of time. Secondly, many refinance transactions these days are for loans just 1 to 2 years old, when significant closing fees were incurred during the purchase or refinance. If you refinance more than once in a short period of time, you need to take into consideration closing costs paid on the previous transaction.

In other words, you need to look ahead when refinancing because in a market with declining rates it's possible that you may refinance still again.

Here's an example:

If you paid a discount point one year ago to get a better rate and now rates are even lower that discount point is essentially lost, isn't it? Yes, you may have gotten an income tax deduction from the point but it didn't really help you out in the long run, did it? Usually a point will get you about 1/4% drop in rate for a 30-year fixed-rate mortgage. Say your loan is $100,000 and a no point loan goes for 7.00%, making your payments $665 per month. If you paid one point to get 6.75%, your payment would drop to $648.60, or a savings of $16.40 each month. Your point cost you $1,000, so by dividing your monthly savings ($16.40) into $1,000 you'll see that you got the "benefit" of the point in 61 months. That's over five years.

What if you took that same thousand dollars and invested it into a guaranteed instrument like a tax free bond or note?

Better yet, if you took that same $1,000 and used it to pay down your principal at closing instead of for a point, you'd save over $7,000 in interest over the life of the loan.

Perhaps an even better alternative would be to take a higher rate and pay no closing costs. Let's say there are $2,000 in closing costs in a typical refinance for a $200,000 loan, or 1 percent (point) of the loan amount. By increasing your interest rate by another 1/4% you may find a no-closing cost loan that pays all the closing costs for you. Not rolling them into your loan. Paying them for you. In this case, your monthly payment would increase by $33.75 while avoiding any closing costs. But you saved $2,000 in doing so, not recovering those fees until well into the sixth year. You might have found that you could lower your monthly payment with a refinance at little or no cost to you.

So there you have it. Before you choose a rate, ask for all your options. You may find that lower closing costs associated with your refinance may in fact be your best deal.