To refinance or not to refinance?

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What’s happening in the mortgage market right now is equivalent to free money. In other words, interest rates are so low that a borrower who took out a 30-year loan years back can refinance into a 15-year and save tens of thousands in interest with little impact on monthly payments.

Let’s say that, 5 years ago, you took out a $200,000 loan for 30 years at a rate of 6 percent. The payment would be $1,199.

After five years, your balance would be $186,000 and the amount of remaining interest that you would have to pay over the remaining 25 years would be approximately $173,520.

Now, let’s say that you refinanced that remaining $186,000 on a 15-year fixed at 3.375 percent. The payment would be $1,318, which would be $119 more than the current payment, but the total amount of interest that would be paid over the 15-year period would be approximately $51,293.04. You would save about $122,226 and your loan would be paid off 10 years sooner.

And imagine how your standard of living could change once you no longer have a mortgage payment.

There are a couple of pitfalls to beware of, though, when refinancing your home.

POINTS — Do not pay points. One point is equivalent to 1 percent of the loan amount. On a $200,000 loan, that would be $2,000. By paying points, you can get a lower rate, but the rate usually isn’t that much lower, and you’d have to wait way too long to reap the benefits

CLOSING COSTS — Average closing costs on a refinance are approximately $1,800. A lot of lenders are offering rates that have no closing costs. When comparing rates that have closing costs with no closing costs, make sure that your breakeven point is two to three years down the road. I am a big advocate of no closing costs because there is no breakeven point; you begin saving money from the first month.

PRE-PAYMENT PENALTIES — For most mortgages in Illinois, pre-payment penalties are not allowed, but make sure that you ask about them and see on paper that there are in fact no pre-payment penalties. The document to review is the “Truth in Lending” form.

About Ron Ricchio

Renato (Ron) Ricchio is president of Chicagoland Home Mortgage. He grew up in Westchester and attended St. Joseph High School and DePaul University, taking a job as a loan officer in the mortgage industry soon after graduating with a bachelor's in finance in 1991. He started his own company in 2001, which he operates today. He has been ranked in the top 150 loan originators in 2010 and 2011 by Origination News. Ron is happily married with three beautiful children. A board member of San Francesco Di Paola Society and the founder of Ricchio Family Toy Drive for Lurie's Children's Hospital, he enjoys cooking and spending time with family and friends.

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