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Step 1
The question of when to refinance a mortgage needs to begin with a little research. First know and understand what your mortgage rate is. For example, let’s say your home mortgage interest rate is 6% for the life of your 15 year loan. Then ask yourself what the current interest rate trends are: are interest rates falling? If they are rising, then refinancing does not make sense. You should only refinance if interest rates are falling. Next you need to call your lending bank and find out what their current rate is. For example, let’s say it has dropped to 5% since you started your loan. A drop in interest rate this significant early on in your loan is good thing if you wish to refinance.
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Step 2
Find out the fee to refinance your mortgageThe second step towards refinancing your mortgage involves doing a little math. You will need to ask your lending bank what the fee will be to refinance. Let’s say the fee is $800. Next you will need to calculate what your savings will be if and when you refinance your mortgage. Let’s say you will save $5,000 over the life of the loan. Subtract the $800 fee from $5,000 and you will get $4,200—the amount of money you will really save. Then to figure out the break-even point, figure out how much you will be saving per month. Let’s say your mortgage payment will change from $1,250 per month to $1,200 per month as a result of the refinancing. The difference is $50 per month. The fee you had to pay to achieve this refinancing was $800 (in this example), so take $800 and divide it by $50 = 16 months. That means that after 16 months you will recoup the cost of the fee in the overall loan payment you will have to make.
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Step 3
Ultimately, deciding when to refinance a mortgage requires a little guess work. If when you do the math in step 2 you find out that refinancing will save you several thousand dollars and the break-even point is far less that the length of time remaining on your loan, then refinancing is a great option. But you must decide when the BEST time is to actually go ahead with the refinancing. Keep in mind that interest rates could continue to go down, which could save you even more money in the long run. However, at the same time, rates could start climbing back up and you would save less. Also keep in mind that refinancing a home mortgage several times is not as effective as refinancing it ONCE at the optimal time due to the fact that you usually have to pay a hefty fee EACH time to refinance. In the end, you will just have to make a decision about when to refinance a mortgage based on your best estimate of interest rate trends, your monthly loan payments, and the bank’s refinance fee.
Comments
sonni57 said
on 4/9/2009 Good information on how to know when to refinance.