Thursday, January 12, 2012

How to Catch a Falling Knife Without Getting Cut

You’ve probably heard the adage “never try to catch a falling knife”. Like all such wisdom it’s grounded in truth. What are your chances of grabbing the handle versus the blade? Not good given that the blade of most knives is twice as long as the handle. But today you have an opportunity to catch a falling knife with no risk of getting cut: re-finance your mortgage.

The US national average for a 30 year fixed-rate mortgage is currently around 3.92%. How does this rate compare to your rate?

Here’s an easy calculator you can use to estimate your new payment:

The rule on the efficacy of re-financing is typically quoted as: “a 1% reduction in rate”.

My rule is: “a reduction in total annual payments equal to at least one month’s payment under the current loan”.

For example:

  • Current loan of $200,000 at 4.875%, monthly payment of $1,058 (annually = $12,696)
  • New loan of $200,000 at 3.92%, monthly payment of $946 (annually = $11,348)
  • Monthly savings: $112
  • Annual savings: $1,344
Voila. You own the same home with a 10% reduction in financing costs.

Caveats: rates offered are highly dependent on your credit score, employment, household income and household debt ratio among other factors. Pay attention to “points” (pre-paid interest)  and closing costs. Your best place to start is with your current lender – they may have an “EZ Re-Fi” program designed to keep your business on their books. Many lenders are offering “paperwork only” re-fi’s just for this purpose.

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