Fort Myers Daily

David Wright is the Sr. Vice President, Residential Mortgage Lending Group at the Sanibel Captiva Community Bank

Time to Refinance?

David Wright, Sanibel Captiva Community Bank
There exists a conventional wisdom that says if you can save a full percentage point or more it may be a good idea to refinance your home mortgage.   I like that notion too but recently a few of my clients have elected a different route; accept a modestly higher rate and allow our bank to contribute to their closing costs.  True they lose a little stature at cocktail parties when everyone is bragging about how low a rate they negotiated but when we consider how little they paid to close their loan it turns out they are money ahead with the modestly higher rate.  Sounds unlikely so let us look at an example.

Loyal Customer A currently has a $270,000 loan with a 30 year fixed rate that he took out last year at 5.375%.  Loyal Customer A’s principle + interest payment is $1,511.92 per month on this loan.

Closing costs on a refinance of this loan in sunny Florida will be approximately $5,400.

Loyal Customer A has options. 

1)  He can add those costs to his loan balance and refinance $275,400 securing a 30 year fixed rate loan at 4.375%.  His new monthly p.i. payment is $1,375.03

In this scenario he recovers his closing costs in 40 months (closing costs ÷ monthly savings). That is kind of a long time to wait for a return on the investment in closings costs and your local banker would probably not recommend you refinance.

2) Loyal Customer A can accept an interest rate of 4.750%, allow his bank to contribute $4,400 toward his closing costs and pay only $1,000 for his refinance.  To be consistent we add the $1,000 to his new loan and refinance $271,000 @ 4.750%, monthly p.i. payment $1,413.66.

Monthly savings $98,26 per month, closing cost of $1,000 recovered in 11 months.  That is a deal your local bank can endorse.

What have we learned here?  Loyal Customer A working with his local bank found a solid economic justification for refinancing his home even though he only reduced his rate .625%.  He may lose bragging rights with his golf buddies but he is thousands of dollars ahead.  And that rule of saving 1%…maybe not as absolute as we imagined. 
 

David A. Wright
Sr. Vice President, Residential Mortgage Lending Group
Sanibel Captiva Community Bank
2475 Library Way
Sanibel, FL  33957
Phone (239) 472-6100
Fax  (239) 333-2957
Cell  (239) 209-1059