Mortgage interest rates are down once again which is making homeowners wonder if they should refinance their homes. The first step in this process is to determine your goal for refinancing. After clarifying your reasons for refinancing a mortgage, you need to consider whether the timing and circumstances make this the right time to get a new loan.
To help you with the decision on whether or not to refinance your home, we have listed out some aspects to consider before your refinance.
Even small changes in the interest rate on mortgage loans can have a much larger impact on a household’s monthly mortgage payments, and those changes can add up to considerable sums over a mortgage’s typically long life.
Example: Monthly Savings on refinancing
$400 per month, $4,800 per year
Refinancing a mortgage at a lower interest rate does not always work out to be the right decision. Closing costs is an important aspect to consider. Refinancing a mortgage multiple times reduces your overall financial benefit and also leaves one with a trail of closing costs. In some cases, refinancing a mortgage makes sense. In other cases, it may be more prudent to stick with your current loan.
BREAK EVEN POINT:
An important aspect for consideration is the break-even point that represents how soon the cost of the refinance will be recaptured through lower monthly payments. While the break-even point is easy enough to calculate, other factors may also influence one’s decision. While there is no rule of thumb for the maximum payback period, or break-even point, that makes sense for most borrowers, three years or fewer typically is considered reasonable if you intend to keep your mortgage at least that long.
To calculate a break-even point, divide the anticipated total cost of your refinance by the monthly savings on your loan payment. The result is the number of months that would be required to recoup the cost.
Example: Calculate break-even point
|Cost of refinance:||$4,000|
|Break-even point:||10 months|
While the break-even point is a useful analysis, there may be additional factors to consider when making the decision on whether or not to refinance:
- Your current loan has an adjustable interest rate
- Your new loan may have a longer or shorter term than your current loan
- Your new loan may require mortgage insurance
- You might want to pay points to lower the interest rate on your new loan
- You may want to cash out equity or consolidate other debts such as a credit card balance or car loan
With interest rates near historic lows and new financing programs offering closing cost incentives, now may be the perfect time to refinance your home loan.
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