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How do you know when it's time to refinance?
First, decide on your goal. Are you interested in long-term lower monthly rates or better terms? Or, are you looking for extra cash to pay for remodeling your kitchen or bathroom?
Next, make sure interest rates have dropped enough to warrant refinancing. For instance, if you have a $100,000, 15-year fixed rate loan at 8.25 percent, the monthly payment would be about $970. If you refinance the loan at 7 percent, with the other terms remaining constant, the monthly payment would drop to $898, a savings of $72 per month or $864 a year. Over the 15-year period, the interest savings would be almost $13,000, a wonderful nest egg.
But closing costs, legal bills, title insurance, the appraisal, points and fees can eat up what you think you'll save. For example, if you have a $200,000, 30-year mortgage at 9 percent interest with monthly payments of $1,609.25 and refinance at 7 percent, you'd save $278.65 a month. But if closing costs are $5,000, you'd end up having to live in your home at least 18 months more just to break even.
Obviously, the longer you plan to live in your home after refinancing, the more time you'll have to recover any upfront cash you have to pay out.
For those who hold 30-year mortgages, consider refinancing your home loan for a shorter term, say 15 or 20 years. Not only will you save yourself thousands of dollars in interest payments, you'll clear the debt that much faster.
...Perhaps in time to pay for college tuition. |
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 Don't just shop for the lowest rates when you refinance. Factor in closing costs and fees.
Check your current loan to see if you would be subject to a prepayment penalty if you refinance.
Try to find a zero-point, zero-fee loan. Often, lenders will build this cost into the rate, but if that rate is still lower than what you're currently paying, you could save from the first day.
A good place to check for rates is online, or through your local mortgage lender.
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