I received a call from a client yesterday seeking my advice on whether or not the client should refinance a property in Tallahassee. After asking the client several questions, my advice was against refinancing until he had a better understanding of how long he would own the property.
Here is how I determined this advice.
Tallahassee Mortgage Refinance - Q & A
- What is the purpose of the refinance? Lower the monthly payment
- How long have you owned the home? Four years
- How long do you plan on owning the home into the future? At least three more years, most likely five or more years.
- What is your current interest rate? 6.25%
- Do you currently pay PMI Insurance? No
- What did you pay for the home? $236,000 four years ago (financed $212,400)
- What is your current payment (Principal and Interest)? $1,308 per month
- What is your current loan balance? $202,000
With that information in hand, here is how I determined my response.
The Tallahassee home will currently appraise for about $275,000. As long as the new loan is kept at 80% loan-to-value (80% x $275,000 = $220,000) or lower, my client can get the best rate program available. Expecting closing costs for this refinance to be about 2% of the loan balance (roughly $4000-$5000), I figured new loan would be his old balance plus $5,000 more which totals $207,000 for the new loan. Currently, I believe the thirty-year fixed rate to be roughly 5.75%, so the new payment (P&I) would be $1,208 per month, a savings of $100 per month. That means his break-even would be fifty months ($5,000 closing costs divided by $100 savings per month = 50 months).
With his break-even being over four years away, and his expectation of ownership being three to five years, I did not feel that increasing his loan amount by $5,000 now would make sense. Nobody really knows for sure how long they will own their home, but making a best-guess is really important in determining whether or not to refinance the property. While saving $100 per month seems like a smart thing to do at present, having to give it all back, and more, in a few years when selling does not seem to make great sense.
In this case, I used the thirty-year fixed rate program, even though the client did not expect to own the home for much longer than five years. This scenario is perfect for a loan program that is fixed for five to seven years and then adjusts, as he will not own the home at the point of adjustment. Unfortunately, the rate differential was not that attractive and the client did not have the confidence level in his expectation of how long he would own the home, so we stayed with the thirty-year fixed-rate program. Do not hesitate to look at other loan programs if you know you will be selling at or near a specific point in the future.
So, if you are considering whether or not to refinance a home in Tallahassee, here are the questions that you need to ask yourself:
- What is the purpose of the refinance?
- How long have you owned the home?
- How long do you plan on owning the home into the future?
- What is your current interest rate?
- Do you currently pay PMI Insurance?
- What did you pay for the home?
- What is your current payment (Principal and Interest)?
- What is your current loan balance?
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Joe Manausa is a real estate investor and the Broker and Co-Owner of Century 21 First Realty. He can be reached via e-mail through the Tallahassee Real Estate Website or catch his latest writings on the Tallahassee Florida Real Estate Blog , or by calling (850) 386-2001.
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