Mortgage interest rates recently fell to all-time lows and buyers
have been getting loans from major banks for as little as three and half
to four percent interest. That means that many homeowners may be in a
good position to refinance out of a more costly loan while rates are
The first question you should ask yourself to determine whether a â€œrefiâ€ is for you is how long you intend to keep your home.
â€¢ If you are planning to sell within the next 2-3 years, for example,
the closing costs and fees you have to pay to do a refinance will
probably make it very difficult for you to recoup your refi expenses
before you sell and move. In that case you are better off resisting the
urge to refinance at this time. Save your cash for a down payment on the
home you plan to buy in a few years after your property sells.
â€¢ But if you plan to keep the home for the long term, refinancing now
â€“ before rates begin to climb higher as they are expected to start
doing soon â€“ could save you a bundle. In that case figure out the
difference between what your mortgage costs you now and what your new
mortgage expenses will be. Be sure to include the cost of refinancing.
â€¢ If you now pay $3,000 per month, for instance, but your new
mortgage will only cost $2,800 thatâ€™s $200 per month in savings or a
yearly savings of $2,400. But if your closing costs on the refinance are
$4,500 then it will take you almost two full years of new savings to
recoup those costs. That means you will not break even until after those
two years pass.
â€¢ Starting at the end of year three, however, youâ€™ll save $2,400 in
net savings. Then over the next 10 years youâ€™ll save about $25,000 or
more. Thatâ€™s a pretty great return on your original investment of just
$4,500 in refinancing costs. For most homeowners it is usually smart
to refinance if the savings that can be gained by refinancing reach a
level of at least two percentage points off of your current interest
rate. That way it is possible to minimize the costs of application fees,
points, and other expenses that are part of any typical refinance
package. So if you bought your home with a mortgage that carries six
percent interest and now you can switch into a new loan with a rate of
four percent interest or less, it is probably a good idea.
The 30-year mortgage is the most popular, but 15-year fixed rate
mortgages are also now really affordable, just because rates are
extremely low. That means that you can get a 15-year note and pay
monthly mortgage payments that are not that much higher than what you
might be paying now on your old 30-year note or your ARM loan. Check
with your local real estate agent to find out more about your mortgage
finance options and what kind of home you can afford based on todayâ€™s
incredibly inexpensive mortgage finance products.