When Does It Make Sense to Refinance?

4 Feb

Have you refinanced your mortgage once or more than once in the past several years?  Have you been thinking about it and just never got around to looking into it?  Well, interest rates have been at historical lows for some time now, but given the economy, unemployment rates and condition of the real estate market, credit is harder to obtain.  But if you have a good credit record, solid employment history and plan to stay in your home for some period of time, looking to refinance can save you thousands of dollars!  Read the following article from USNews.Com.

When Does It Make Sense to Refinance?

by Colin Robertson
Tuesday, February 1, 2011
USNews.com

In case you didn’t hear, mortgage rates hit an all-time low last year. The popular 30-year fixed-rate mortgage fell to 4.19 percent in early October, but has since risen to 4.74 percent, according to figures from mortgage financier Freddie Mac.

More from USNews.com:8 Painless Ways to Save Money50 Ways to Improve Your Finances in 2011The Biggest Money Mistakes Couples Make

 

However, mortgage rates remain at historically low levels, making it a prime time to refinance, assuming you haven’t done so already. Of course, it only makes sense to refinance if you’ll actually some save money, but figuring that out takes a little bit of legwork. First, you’ll need to gather some information, including your current interest rate, the remaining term of your mortgage, the term on your proposed refinance loan, and estimated closing costs.

Let’s look at an example:

Loan amount: $250,000

• Current mortgage: 5/1 ARM

• Current mortgage rate: 6.2 percent

• Remaining term: 240 months

• Refinance mortgage: 30-year fixed at 4.75 percent

In the scenario above, your current monthly mortgage payment would be $1,539.29. Assuming you refinanced into the 30-year fixed mortgage at 4.75 percent, your monthly payment would fall to $1,304.12, a savings of roughly $235. Not bad, right?

Well, you also have to factor in income tax implications and closing costs (unless it’s a no cost refi). But let’s assume you pay a 1 percent loan origination fee ($2,500) and another $1,250 in closing costs. That $3,750 sum is the cost to refinance. Using simple math, without the impact of tax and remaining term, it would take about 16 months of making lower payments to recoup that $3,750. So you wouldn’t see much a benefit until then — but the longer you stayed with the refinanced mortgage, the more you would save. Fortunately, there are refinance break-even tables available for free online that do all the math for you.

A few other considerations to ensure refinancing actually makes sense:

Our example included a 5/1 adjustable-rate mortgage, meaning it’s fixed for five years, and then adjusts annually for another 25 years. If mortgage rates are expected to rise over time, that rate could adjust much higher than the current 6.25 percent, making it even more sensible to refinance into a lower fixed-rate mortgage today.

But how long do you plan to stay in the home and/or with the mortgage? If you only think you’ll be in the home for a few more years, it might make sense to stick with what you’ve got. And if mortgage rates happen to fall further, you may want to refinance again in the near-term future, so refinancing now wouldn’t be as favorable.

Also note that the mortgage rates you see advertised online and on TV may not be the actual rates you receive, due to the complexities of mortgage underwriting. That’s why it’s imperative to prepare yourself prior to applying for a mortgage, now more than ever, because banks and mortgage lenders have made qualifying for a mortgage much more difficult.

Colin Robertson is the author of several finance websites aimed at helping consumers save money, including The Truth About Mortgage and The Truth About Credit Cards, which includes his popular credit score range.

One Response to “When Does It Make Sense to Refinance?”

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  1. When Does It Make Sense to Refinance? « DeclutterOrganizeRepurpose | Refinance Home Loans - May 20, 2011

    […] When Does It Make Sense to Refinance? « DeclutterOrganizeRepurpose […]

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