When (And When Not) to Refinance Your Mortgage
Is it time to refinance your mortgage? Yes? No? Not really sure? For home owners who have a mortgage and have read recent reports that rates have moved and it might be time to consider refinancing your existing loan and capture the new, lower rates, considering a refinance has probably become an occupying thought. But is a lower rate a good reason to refinance? And if so, does the rate have to be at a certain level to make it worthwhile? Is there a way to tell whether a refinance works or is it better to just leave the mortgage along and move on? Let’s look at some ways to tell when a refinance might be a good idea and when it might not.
First, don’t refinance based upon the interest rate alone. An interest rate along with your loan amount and term are used to arrive at what you pay each month. Don’t look at your current rate and if the rate goes lower by say, 1.00% then automatically think it’s time to refinance. Instead, compare the difference in monthly payments compared to what you now have with what you would have by refinancing.
Then, divide the difference in monthly payments into the closing costs needed to obtain a refinance. The result is the number of months you will need to recover the closing costs due to the lower payments. If you’re going to keep the mortgage for at least that period of time a refinance might be a good idea. Maybe. Yet if it takes a few years to recover those costs, maybe it’s best to sit tight. Most loan officers will tell you that a two to three year recovery period is optimal.
If your math tells you it will take five, six or even seven years before your monthly savings finally offset the closing costs needed a refinancing may not be your best move. Ask your loan officer for different scenarios where the loan officer can adjust your rate and see if there is any room for a lender credit that can offset some or all of your closing fees.
Do you have an adjustable rate and intend to keep the property longer than what your 3/1 or 5/1 hybrid will remain fixed? If you’re looking long term and have a hybrid or variable rate now you should consider getting rid of the unpredictability of an adjustable rate mortgage and lock in a long term, fixed rate. Most borrowers take out a hybrid or adjustable mortgage because when first taking out the loan the intent was to move within a relatively short period of time, say within five to seven years. But things change and if your circumstances sound familiar to this situation and rates are still low, it might be a good idea to switch from an ARM to a fixed.
There really is no secret formula regarding when you should or shouldn’t refinance because interest rates change and there are different scenarios to consider. But if you’re not sure or think you might benefit by replacing your home loan, a telephone conversation with your loan office can point you in the right direction.
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