When Does It Makes Sense to Refinance?
Posted by Paul Gonzales | Visited 284 times, 1 so far today | Currently 1 Comment »
Trying to decide whether or not to refinance your mortgage can be like trying to find treasure on a deserted island. You can shovel a lot of sand and still come up empty-handed at the end of the day. However, you can sift it all down and find that nugget of wisdom rather quickly if you know how.
There are three primary reasons to refinance your mortgage:
(1) To take advantage of a lower interest rate and/or smaller monthly payments
(2) Pull cash out of your equity to consolidate other more costly debt, like credit cards, car loans, student loans and such, thus saving a lot of money each month
(3) Pull cash out to invest or pay for other expenses such as college tuition, home improvements, medical expenses or taxes.There are other reasons to refinance that you might consider such as swapping an adjustable-rate loan for a fixed-rate mortgage, but they all boil down to the three primary reasons noted above.
Refinancing to consolidate debt, invest or meet other obligations is usually straightforward and the numbers are easy to grasp. But how do you know when refinancing just to lower your interest rate or monthly payment really makes financial sense?
Back when the Beach Boys were Surfing USA, the “rule of thumb” was that it made sense to refinance your loan if you could lower your interest rate by 2 percent (say from 12% to 10%). But that was in the days when the typical middle-class home loan was $65,000.
Today, with most home loans considerably larger than that, a good standard rule is that if you can recover the cost of refinancing within 24 to 36 months, you should consider doing so.
For example, if you can refinance your $300,000 loan and reduce the interest rate by just one-half percent from 6.5% to 6.0% you will save $98 per month. If the cost to refinance is $2,900, dividing that cost by your monthly savings of $98 results in a payback of your initial $2,900 cost in about 30 months.
This simple calculation is called a “break-even analysis”. After 30 months, you are making money on your lower interest costs – and that makes sense for most people. As I have said before, consult your trustworthy loan officer and ask him or her to work up a break-even analysis for you. Then you will quickly be able to sift a beach-full of sand and discern that golden nugget!
Call me at (800)775-7334 or email me at paulforloans@aol.com to see if refinancing makes sense for you!
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor