Time To Refi?

There are numerous reasons why you may want to refinance your current mortgage, but in the end, they all revolve around saving money. In the past, the decision on whether or not to refinance was broadly based on comparing the savings generated by a lower monthly payment against the costs of refinancing. But in recent years, lenders have introduced “no cost” and low cost refinance loans that minimize or completely eliminate the non-recurring, out-of-pocket costs of refinancing. These types of refinances involve either a slightly higher rate or including some or all of the costs in the amount that is financed.

The old rule-of-thumb that your rate should drop 1% or more before you refinance is no longer valid, given these ways to refinance. Certainly a drop of 1% in your interest rate makes refinancing worthwhile. But with these newer “no cost” and low-cost refinancing programs, it can be worthwhile to refinance to obtain a smaller reduction in your interest rate. The other pertinent question you must address is how long you expect to stay in your home. If you are moving in a few years, you might never break even on the refinancing costs.

Three other major reasons to refinance.

1. Build equity in your home faster. By refinancing to a loan with a lower term, you will pay off the balance quicker, thus saving interest costs. The drawback is that your payment may be higher with a shorter term. But if paying your house off before your children go to college, or before you retire is a motivation, you will accomplish those goals and save an enormous amount of money by shortening your mortgage term.

2. Trade your Arm for a Fixed Rate Loan. If you currently have an ARM (Adjustable Rate Mortgage), your rate will adjust to a new, probably higher, rate at some point in time. If you are planning to stay in the home past the fixed rate period of your ARM, you may well want to consider trading in the ARM for a fixed rate loan. If your time in the home is limited to a three to five year period beyond the ARM’s fixed rate period, you may want to look at going back to another 3/1 or 5/1 ARM.

3. Use your home’s equity to make improvements or pay off higher interest rate consumer debt. If you can borrow using your home at 7% and pay off revolving and installment debt at 15% - 19%, and get a tax deduction, it would probably be worthwhile to investigate a refinance. (The tax deductibility of your mortgage interest should be confirmed by your tax advisor based upon the tax basis, that you have in your home.) But it makes perfect sense to pay off debts with high interest rates.

The overriding factor in considering refinancing - Savings vs. Costs

Carefully weigh the costs of refinancing against how long you plan to stay in the property. Figuring out your break-even point as opposed to your expected length of stay in your property will help spell out the soundness of refinancing, whatever your assumptions may be. Overall cost and not just the interest rate are very important factors when deciding to refinance or not.

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