IT SEEMS A DAY NEVER GOES BY that I don’t receive some kind of refinance solicitation, either in the form of those pesky popup ads that seem to track my every move on the Internet, or in the mail from folks who claim they can save me thousands of dollars. And based on conversations I have had with clients, I don’t believe that I am alone. Somebody is sure spending a lot of marketing dollars trying to convince homeowners that they can save money on their mortgage by refinancing.

So when does it make sense to refinance, and are there other ways to save money on your mortgage without refinancing?

Just because rates may be lower today than when you took out your mortgage does not necessarily mean it makes sense to refinance. When considering a refinance it is important to consider the overall interest cost over the life expectancy of your loan — and most importantly, what you plan to do with the monthly savings from your refinance.

It is really as simple as math. Let’s say you purchased your home in 2010 and obtained a $300,000 mortgage at 5 percent — your principal and interest payments would be $1,610.46. After paying on your loan for five years, you now owe roughly $275,000.

Refinancing today at 4 percent would give you a principal and interest payment of $1,313, resulting in a net monthly savings of almost $300; sounds pretty good so far. Now here is the catch — what are you planning to do with this $300 in monthly savings?

Let’s say you decide to sell your home five years later. If you have reinvested this $300 by paying down your principal balance each month, you will only owe $229,281 at the end of five years (compared to $244,027 if you had not refinanced and reinvested your savings). However, if you see this as an extra $300 of budgetary windfall and don’t reinvest your savings, you will actually owe more at the end of five years — $248,730 — than if you had never refinanced.

There are other ways to save on your mortgage besides refinancing. The “bi-weekly payment” option is a method touted by some as a way to shave off years from your loan. With a bi-weekly payment, borrowers simply make a half payment every two weeks, resulting in 26 half payments or one additional payment each year. This additional yearly payment acts as a principal reduction payment and accelerates the pace of amortization.

Be careful when considering this, though, as it often requires a separate payment services agreement with a party other than your lender. In many cases the fees charged by the third party significantly impact your savings.

Generally, I advise clients to simply work directly with their lender and make additional monthly payments toward the principal. This way they create similar results without the fees an outside payment services company would charge, and they also get a chance to adjust their payment amounts depending on other budgetary factors.

Most professionals in the mortgage industry have tools at their disposal to assist you with the analysis of any refinance proposal. If you are contacted by someone soliciting your refinance, insist they run the analysis and furnish you with reporting so that you can make an educated decision.

Finally, whenever I write about interest rates, fees or terms, my legal folks begin to get nervous; so please know that this column is meant for informational purposes only, and any reference to interest rates is for illustrative purposes and definitely not an offer to lend.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or guyb@fairwaymc.com.

Sharing is caring!