Tuesday, January 20, 2015

When Does Refinancing Your Mortgage Make Sense?

We keeping hearing about how rates are going to go up any day, month, or year now. However, every day, month, and year that goes by I see rates sticking around at all time lows. Let’s not get into the media frenzy of predicting mortgage rates, but if you are seriously looking at refinancing then there are several question and key points for you to consider. First, how long do you plan on staying in your home? Second, what sort of rate do you have right now, and how much can it really be improved? What are the fees and costs associated with the refinance? Can a NPBS fixed rate mortgage be your solution? These are all questions to ask before refinancing your mortgage.

You really need to consider how long you plan on staying in your house before going through the refinance process. Chances are you have no idea the number of years you will require your mortgage to be without first considering how long you want to live there. If you know that you employer plans on transferring you out of the country sometime within the next ten years it may not make sense to refinance into a 30 year loan. Rather, you can look at rates for a 10 year loans, which are considerably less in interest. Or perhaps you know you have found your dream home and plan on living there the rest of your life. In this case I prefer to err on the side of caution and take out a full 30 year term loan. Rates may go down over that time period, but they could go up as well, I’d prefer not to leave my finances to chance. 


The rate you currently have right now is very important, as are the costs and fees associated with refinancing. You didn’t think that mortgage companies refinanced for free, did you? A general rule of thumb is that you should save at least 0.25% off your current interest rate for a refinance to be worth it financially. If you have to spend a couple thousand dollars on a refinance then it will take you some time to recoup that money, and anything less than 0.25% might not be worth it. You will often hear of zero cost refinances, and this is sort of true, but misleading at the same time. Zero cost really means deferred cost. Rather than paying for the lowest rate upfront, you are saying you are willing to accept a slightly higher rate than necessary in order to offset the loan costs. I have actually done this myself, three times to be exact. It’s a good thing because I sold my house shortly after the refinance, so I was able to pay down a little extra principal on the loan without paying costly refinance fees.

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