Is Now The Time to Refinance Your Mortgage?

With interest rates at a historic low, many homeowners are thinking about the prospect of refinancing. Savings depend on what the new loan costs as well as how long you plan to stay in your home. Here are some important issues to consider:

  • Costs: You will need to add up all the costs, including application fees, points, loan origination, appraisal, credit report, extra insurance, inspections, private mortgage insurance, recording, survey, title insurance and underwriting.
  • Monthly savings: Figure out your monthly savings by subtracting your current monthly payment from your refinanced monthly payment.
  • Tax costs: Multiply your monthly savings by your combined state and federal tax rate.
  • Net savings: Subtract your tax cost from your monthly savings. The cheaper loan gives you less of a tax benefit than your present loan
  • Break-even point: Divide your total costs by your net savings to determine how many months it will take to pay off the cost of refinancing.

For example, if you will save $100.00 per month on the refinanced mortgage and the refinanced mortgage costs you $2,500, it would take you just over two years, or 25 months to break even and start enjoying that savings.  If you plan to move within two years, that loan might not be for you.

  • Hidden costs: If your current loan contract includes a pre-payment penalty, you have to factor it in too.  Some penalties can be as high as six months interest on 80 percent of your balance, but diminish the longer you hold the loan.

Generally, lower points (each point is 1 percent of the amount financed) produce a higher interest rate. If you plan to stay in your home for only a few years, a zero-point loan would most likely be a better option because you may not have the opportunity to recoup those costs. If you are staying longer with more time to recoup the costs, consider a cheaper interest rate with points.

Beware of no pointers. They can be useful if you are cash poor, but in addition to the higher interest rate, some come with pre-payment penalties that kick in if you refinance again too soon.

To find the best deal, start with your current mortgage lender. Some lenders have marketing options designed to keep their current borrowers by offering them special low rate or no-cost refinance packages.

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