Last updateWed, 20 Sep 2017 9am

Business & Real Estate

To refinance or not to refinance? That is the question

How low do interest rates have to go before refinancing your home makes sense?

By Fred Hibbert and George Manaco

If you currently carry a mortgage with an interest rate of 8.5 percent or higher, the Federal Reserve's recent rate drops may "hit home" - offering many of you benefits that directly impact your wallet. Considering refinancing, but not sure if it is the right option, right now?

Here is my recommendation of when it makes sense for you.

Like gasoline, food and medicine, money is a commodity - which means, like all commodities, money has a price. The price of the money you borrowed to buy your home is the interest you pay through installments every month.

What does the recent decline in interest rates mean to you - assuming you already have a mortgage and are making monthly payments on your home? It means refinancing is an option that may allow you to reduce your monthly mortgage payments. With a mortgage refinance, you are actually re-paying your existing home loan and borrowing new money to pay for your house at a lower price.

If refinancing your existing mortgage sounds like a great concept. But it is not for everyone. Because refinancing involves closing costs, which are additional costs associated with processing a new loan, it only makes sense to pursue this route if you refinance for an interest rate that is at least 1.5 percent lower than the current interest rate of your loan and only if you are planning to stay in your home for a minimum of three or more years.

How can a homeowner determine if refinancing produces a justifiable savings? Let's assume you hold a 30-year, $400,000 mortgage with an interest rate of 8.75 percent. You are currently paying $3,146 in monthly principal and interest. Based on an interest rate of 7.25 percent, refinancing a $400,000 loan would result in a reduced monthly payment of $2,728, or a monthly savings of $418. Now let's assume the closing costs to secure the new loan are $3,500. Is it worth refinancing? Yes, because the monthly savings of $418 amounts to $15,048 in savings over three years, which exceeds the $3,500 in upfront closing costs. In fact, this refinancing pays for itself in just nine months! Over the life of a 30-year loan, this refinance will save a whopping $150,480.

Obviously, in this case, it would make sense to refinance. To apply this example to your specific mortgage values and see if it makes sense for you, visit the mortgage center at www.coldwellbanker.com.

The above tips are provided by Fred Hibbert and George Monaco, managers of Coldwell Banker Northern California's two Los Altos offices. Fred oversees more than 65 real estate professionals and George, more than 50. Fred's office is located at 110 First St. and can be reached at 917-4248. George's office is located at 496 First St., Suite 100 and can be reached at 947-2222. They can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it..

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