This is a question I get a lot, especially lately with rates as low as they are right now. Today, we will take look at what it takes to wisely move forward on refinancing your home. There are many things to consider before you incur the cost of a new first mortgage. Cost is a good place to start this discussion. A lot of people don't realize that there are closing costs (bank fees, see previous blog) associated with a refinance. Most of the time these closing costs are rolled into the new loan amount, and the fact that you will skip a mortgage payment makes it a little easier to swallow.
The rule of thumb on rate reduction to justify those closing costs, is about 1.250% when staying within the same term. On a loan amount of $100,000, that's a savings of about $80 a month. The savings associated with that rate drop will still take about one and a half years to recoup the cost of the refinance. If you are looking to shorten the term, for example, going from a 30 year to a 15 year, then the rate reduction is not as critical. Those that have the ability to reduce their terms are the big winners with savings of potentially 10s of thousands of dollars.
What are your plans as to how long you plan on staying in the home? If your thinking of selling and buying something new, refinancing might not be of any benefit to. In essence, rolling in your closing costs will eat up some of your equity, which could hurt you if your selling in the recent future.
If you are considering refinancing, I highly suggest you speak with a mortgage professional that you trust. You want to make sure that refinancing is right for you. Any questions on this topic, please feel free to contact me directly at 585-427-9200 x138.