Should You Refinance Now?
03/07/09
How do you know when to refinance your home? Deciding when to refinance may seem more like an art than a science, but it is just a matter of numbers. Walk through the steps, and at the end you will know whether or not now is the time for you to refinance.
First, what interest rate is your lender likely to offer you? The lower federal interest rates are and the better your credit score is, the better an interest rate you can expect. Although you cannot know your exact interest rate until the lending bank evaluates you and makes an offer, online sources can give you an excellent idea of the range in which your interest rate will fall.
When you know your likely interest rate, decide how long you want the term of the mortgage to be, and use an online mortgage calculator to work out how much your monthly payments will be after the refinance. (Ideally the term of your new mortgage will be equal to the amount of time left on your old mortgage. Otherwise, the longer mortgage term is likely to offset any reduction in interest, and you may as well not refinance.) Also calculate the difference between your current monthly payments and your monthly payments after the refinance.
Then work out how much the fees and taxes of a refinance will add to the total. The costs add up quickly. $2000 to $3000 for a basic refinance is common, but it could be higher.
When you know exactly how much refinancing will cost, divide it by the difference between your current monthly payments and your future monthly payments. The result is the period, in months, that it will take you to break even after you have completed the refinance. For example, if you are currently paying $1200, your future payments would be $1000, and the refinance would cost $2200 in fees and taxes, you will break even in 11 months. After that, you would start saving money. Do you plan to stay in your house long enough to garner noticeable savings from a refinanced mortgage? If the answer is no, then you would be better off staying with your old mortgage. However, if your answer is yes, then right now is the perfect time to refinance.
As you can see, knowing when to refinance is simply a question of math. None of the variables are set until you receive a formal loan offer from your bank, but you should be able to make a good estimate of what your bank will offer you. Apply these steps to choose when to refinance, and you and your family will enjoy greater financial security for years to come.