We see it in the headlines and we hear it daily on the radio. Interest rates are at historic lows. Refinance now! They want to get you caught up in the hype of lower interest rates. Why?
The short answer is because they want to make money off of you when you refinance your loan. The option to refinance your loan is not free. You will pay origination fees, points, appraisal fees, and various other fees. I am not saying that refinancing is a bad thing. What I do want to do is urge you some caution. You need to make sure in the long term that refinancing makes good solid financial sense.
Your Current Situation:
The Refinance Option:
The Refinance Cost:
Does Refinancing Make Sense
If you are planning on selling the house and moving before that break even point then refinancing is not the right option for you. If you plan on staying in the house longer then the break even point then refinancing is the right option for you.
Let us use some real world numbers
Refinance Option (you have been in the home 5 years)
As we can see the refinance will save you $324 per month in monthly payments. That is good but we are not done yet. In obtaining the new loan you would have closing costs. The origination and points are 1% each and let's add in an extra $800 for all the other fees. This would result in a total closing cost of $5481. The results of the calculations say that the break even is about 18 months. If you were planning on moving within 18 months then do not refinance. If you planned on being in the house over 18 months then refinancing sounds good.
Let me be clear, there are other factors involved in the process. Some of the factors are the original appraisal, the new appraisal, and your tax bracket. Also my monthly payment examples did not include taxes or insurance. When these items are factored into the equation it could add at least 12 months to the break even. So, in reality the break even isn't 18 months but truly closer to 30 months. Every situation is unique.
As you can see there are so many factors involved in the refinance question. I cannot give you a simple formula to calculate your exact situation. What I have given you above is a start to help you know if you are in the ballpark to refinance. I am not a tax lawyer, loan originator, or a certified public accountant. My information above is for education purposes only and cannot be construed as legal or other advice. Seek the assistance of a licensed professional to examine your unique situation.
I found a handy calculator to help you determine the refinance option. You can see it at http://www.forthebestrate.com/java/MortgageRefinance.html. Be sure to read the very last sentence on their web page.
We are in historic times. The number of homes on the market is high. The prices of homes are low. And the interest rates are indeed low. At the time of this writing the average 30 year fixed interest rate is 4.75. For many home owners refinancing is a great option. If you are in some sort of an adjustable rate mortgage (ARM) then you should seriously consider getting into a fixed rate low before your rates go through the roof.
ABOUT THE AUTHOR
David E Cairns - REALTOR; CA DRE# 01890743
Century 21 Award; El Cajon, San Diego, California, East County
CDRS - Certified Default Resolution Specialist - MARS Compliant
Visit my blog site for FREE PDF's on foreclosures, short sales, and current market analysis as well as my special page "Hope 4 You"; 9 Options to Foreclosure. I blog about real estate, finances, foreclosure/short sale, fraud prevention, and other useful information for home owners. Drop by and leave me a comment. I'd like to hear from you.
(All information is for educational purposes only and should not be taken as legal or tax advice. Consult a professional for your unique situation.)
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