Should I Refinance My Mortgage?

With unbelievably low interest rates lots of people are considering refinancing. Refinancing is a great way to reduce your monthly expenses and minimize the amount of interest you pay over the long term. So, how do you determine refinancing makes sense for you?

First, figure out what the interest rate is on your current mortgage, and check to see what rate you could refinance to. If your current rate is 5% and today’s going rate is 3.55% there’s a good chance it would be worth refinancing. Check on online mortgage calculator to see what your new payment would be if you did refinance. Don’t forget to factor in taxes and PMI if those are part of your current monthly mortgage payment.

Once you know your new payment vs your current payment you’ll know how much you would be saving per month. Now factor in closing costs. The best way to do this is to call a couple lenders and ask what you should expect for closing costs if you refinance through them. Then you can divide the closing cost by your monthly savings amount and this will give you the number of months it will take you to break even.

For example:

Monthly savings = $142

Closing costs = $1900

Break-even point = $1900/$142 = 13.4 months

In this example, if you planned to keep your property for more than 13.4 months it may make sense to refinance. Although, one other factor you should consider is the length of time you have been paying on the property. If you are already 10 years into a 30 year mortgage, the monthly savings likely aren’t worth the extended term. In this case, you should give a shorter mortgage term serious consideration. If you can cut your remaining 20 years down to 15 years for the same monthly payment, it would be well worth it.

Yet another factor in refinancing is adjustable rate mortgages. In my opinion, there’s a good chance rates will be a good bit higher 5 years from now. So, if you are currently in an adjustable rate mortgage, consider taking the security of a fixed rate while rates are low.

Keep in mind, there are lots of requirements in order to get a loan. Many lenders require 10% equity, great credit, and good job history. For those that don’t meet these requirements, or are underwater, there may be still be some options. Check into the HARP program or if you have an FHA loan, the FHA streamline refinance would be a great option.

The bottom line is, if you haven’t looked into refinancing in the last few years, do some research and call a lender to see what your options are.

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