Interest Rates Have Fallen
Should You Refinance
Sure the lower interest rate sounds great but is it really worth it for me to go through the hassle and expense of refinancing?
The answer to this question is often determined by the answers to the following questions.
1. How much will the refinance save you each month?
2. How much will the refinance cost you?
3. How long do you plan on staying in the home
Once the previous questions are answered it will be much easier to determine if refinancing your current mortgage would be a worthwhile endeavor. The thing I would caution against is relying upon the old rules of thumb. I have heard that you should not refinance unless you are saving 1% or you should not refinance unless you are saving 2%. While it is clear that there should be some financial benefit before one refinances their mortgage, it is my view that a careful consideration of the cost and benefits give a much clearer picture of the wisdom in refinancing or not.
One option we are seeing many people choose in the current environment is refinancing from a 30 year mortgage to a 15 year term. The reason is the tremendous savings in interest payments over the life of the loan. While the monthly payment often does increase normally around $200.00) the savings is almost always greater than $100,000 and often closer to $200,000. Many people have around 22-25 years remaining on their mortgage. If they were able to shave 10 years (120 months) off of their mortgage payments at $1,000 per month, that would be a savings of $120,000 AND they would have their home paid off in 15 years as opposed to 25 years.
As mentioned earlier, one aspect of the 30 year to 15 year refinance that my present a hurdle to some homeowners is the higher monthly payment. While the benefit of the lower term is evident and attractive they simply cannot afford or are not comfortable with the higher payment. In fact many find the idea of refinancing their home loan attractive because of the potential of a lower monthly payment. It is not uncommon to see savings $200-$300 or even more each month on the mortgage payment as a result of refinancing.
Of course the savings will different for each homeowner in their own situation. However, the same formula can be used by everyone to determine if a refinancing their home loan is right for them.
The two pieces of information you need to determine the benefit is the monthly savings and the closing costs of the new loan. Then you divide the costs by the savings to determine how many months it will take recoup the cost associated with the refinance.
For example, if you would reduce your mortgage payment by $200 each month and it cost $3,000 for the new loan, it would take 15 months before you reach the breakeven point. If you sold the home within 15 months of refinancing you would not have recovered the money it cost for the new loan. However, if you stayed in the home more than 15 months, you would have broken even and save more money each month you are in the home.
Give me a call today at 866.435.6553and I will show you all the options available to you. We can discuss the 15 year loan or the various approaches that would allow you to save money each month on your mortgage payment.
