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Ludovic Kohler's Blog

By Ludovic Kohler | Agent in Los Angeles, CA
  • Tips for Refinancing Your Home

    Posted Under: General Area, Home Selling, Financing  |  January 20, 2011 11:28 AM  |  266 views  |  1 comment

    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 still bargains.

    The first question you should ask yourself to determine whether a “refi” is for you is how long you intend to keep your home.

    • 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.

    • But if you plan to keep the home for the long term, refinancing now – before rates begin to climb higher as they are expected to start doing soon – 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.

    • If you now pay $3,000 per month, for instance, but your new mortgage will only cost $2,800 that’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.

    • Starting at the end of year three, however, you’ll save $2,400 in net savings. Then over the next 10 years you’ll save about $25,000 or more. That’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 today’s incredibly inexpensive mortgage finance products.

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