 Better credit raises refinance question
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 Dear
Dr. Don,
I had bad credit but was recently able to refinance my mortgage from a 10 percent loan to a 7.125 percent loan on a $208,000 loan balance. My credit score's even better now and I can get a 6.375 percent loan, but it would cost me another $4,000 in closing costs. Is it worth it?
Thank you,
-- Terry Turnover
 Dear
Terry,
Your decision to refinance depends in large part on how long you
plan on being in the house.
You can estimate how long you have to stay in the
house to break even on the closing costs by dividing the closing
cost by the difference in monthly mortgage payments. Bankrate's
refinancing
calculator will do this calculation for you, but for illustrative
purposes I've put together a table below.
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Sample refinancing calculation: |
|
| Loan amount: |
$208,000
|
$208,000
|
|
| Interest rate: |
7.125% |
6.375% |
|
| Loan term (months): |
360 |
360 |
|
| Loan payment: |
$1,401.33
|
$1,297.65
|
$103.69 |
| Closing costs: |
$4,000.00
|
|
|
| ÷ payment difference: |
$103.69 |
|
|
| Months to break even: |
39 |
|
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So you need to be in the house for 3¼ years
before you break even on the closing costs.
If you plan on only being in the house for three to five years, it's a tough decision to refinance at the lower rate.
The money you spent on the last refinancing doesn't
play any role in whether it makes sense to refinance now. It's what
economists call a "sunk cost." Since that money is spent,
you can't make it unspent. You may, however, be able to use the
fact that you recently refinanced to reduce the closing costs on
the new loan.
A Bankrate special guide to closing costs provides information on negotiating closing costs along with national averages and related information.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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