When Should You Refinance
Refinancing is strictly a game of measuring costs. A slight drop in rates may offer little reason to refinance your mortgage, especially if the trend is pointing downward. Instead of jumping for a lower interest rate, pull out the calculator and do a little homework. Measure the costs of a new mortgage against the savings it yields. This quick exercise could save you thousands of dollars, not to mention the headaches that come with the additional cost of buying your home.A refinancing mortgage, like a first mortgage, has fees. The likelihood that you will have to pay closing costs is quite high. Before applying for a refinancing mortgage, take a look at the outcome. You should recapture more in savings than you pay in closing costs for the mortgage to work in your favor. Realistically, you should look at the savings against how long you plan to stay in your home rather than over the life of your mortgage. When you move, you’ll probably secure a new loan, making your current refinancing moot. Thus, the timeframe for recapturing the fees paid for your refinancing mortgage is shorter than you may think. Keep this in mind as you shop for a refinancing mortgage.
If the closing costs for you refinancing mortgage are $3,000 for example, and you play to stay in your home for another five years, you should save at least $3,000 over five years – at least. Otherwise, you are spending more than you would save. Including inflation, the calculation becomes a bit more complicated, but the outcome is that refinancing savings has to be higher for your new mortgage to work in your favor. Realistically, your mortgage savings should at least double your closing costs for the decision to pay off.
Be honest with yourself when doing the math. Sometimes, it’s too easy to be enchanted with what looks like a great deal. You may tell yourself that you can stay in your current home for a few extra years, even if it seems unimaginable. Don’t put this kind of unreasonable pressure on yourself. Your mortgage is a means to an end: home ownership for as low a cost as possible. When you put the mortgage before the home, you wind up paying more than you have to.
Refinancing is always worth considering, especially as your credit score improves (because you could be eligible for a lower interest rate). But, it pays to work the numbers first. You don’t want to pay the bank for nothing; you already pay them enough! Make sure your refinancing mortgage will save you money before you sign on the dotted line.
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