Refinancing

The four reasons to refinance

Lower the rate. Shorten the term and pay far less interest overall. Drop mortgage insurance you no longer need. Or take equity out for something worth borrowing against.

Each has a different break-even, and the third one catches people out: borrowers sitting on FHA mortgage insurance with 20% equity are often paying for nothing.

• Rate: the obvious one, and the least common now
• Term: thirty to fifteen, with a large interest saving
• Mortgage insurance: refinance out of FHA MIP
• Cash out: only for what is worth the interest

How the break-even actually works

A refinance has costs. Divide those costs by the monthly saving and you get the number of months before you are ahead. If you plan to be in the house longer than that, it pays.

The mistake is comparing only the rate. A lower rate with a reset thirty year clock can cost more in total interest than the loan you already have.

When the answer is no

If you are two years from moving, a refinance with a three year break-even loses you money. If your current loan is already excellent, the honest answer is to leave it alone.

Jason runs the numbers and says so when the answer is no. That is worth more than a lender who finds a reason to close something.

Questions people ask