July 1st, 2014 1:15 PM by Jackie A. Graves
As tempting as current interest rates are, you may want to refinance your
home to a lower rate. Here are five questions you should answer before you take
1. How long do you plan to stay in the
It makes a big difference in recouping
the cost of refinancing a home loan. If you don't plan to own the home for
roughly three to five years or more after refinancing, it might not make sense
to incur the costs of refinancing.
2. What are the closing or settlement
costs for refinancing?
You should expect to pay about the same amount as when you purchased. Expenses
will include a new title policy or abstract, a new appraisal, and lender's
Typically, lenders charge an
origination fee or a "discount fee". If it's a "no-cost"
refinance, there's really no such thing - the fee will actually be rolled into
a higher interest rate. Count on your closing costs to be similar to what you
paid when you originated your first loan. In other words, it's a new loan, with
3. What percentage rate are you
Once upon a time, mortgage lenders
advised refinancing only if you could save two percentage points on the loan.
That's so you can get your closing costs back if you need to sell a year or
more later, assuming your home doesn't go down in value.
But you can refinance by getting as
little as 1/2 percent lower than your current mortgage interest rate and still
be able to sell within a reasonable time - three years or so. What you need to
do is figure how long it will take you to pay back your closing costs before
you sell your home.
You have a $200,000 mortgage, 30 yr.
fixed rate, 6% interest, with a monthly payment of $1199 in principal and
interest or PITI. Assuming $2,000 in closing costs, you refinance for another
At 2 points lower, or 4% interest,
your new PITI (principal and interest) is $ 954.83 With a monthly savings of
$244.17, it would take you just over 8 months to pay back the cost of the
At 1/2 % of a point lower, or 5.5%
interest, your PITI is $ 1135.58. With a monthly savings of about $64, it would
take you a little over 31 months to break even, a good strategy if you plan to
stay in your home at least 3 years.
4. What type of loan do you currently have? Do you have a hybrid
adjustable rate mortgage that needs refinancing?
Many hybrid loans roll from fixed
rates to adjustable become adjustable after one year, three years, or five
years. If you qualified for the adjustable rate loan originally, but have since
increased your income or paid down your mortgage and built some equity, now may
well be the time to refinance.
Interest rates have hovered near the
five-point mark or lower for well over six years, making it likely that
adjustable rates have nowhere to go but up, so it may be a good time to get
into a fixed rate.
5. Have your plans or circumstances
changed from when you first purchased?
Perhaps you're doing well and want to
accelerate your pay-off by refinancing to a 15-year term. Additional payments
to principal can be voluntarily added to your 30-year fixed rate loan payment,
so refinancing is only wise if you can get a much lower interest rate than your
Conversely, perhaps your intentions of
paying off a 15-year note have changed, due to decreased income, family
obligations or some other reason. In that case, a refinance to a 30-year term
will ease your payments, but the majority of your note will be to pay interest,
with little going toward your principal for several years.
Ask your mortgage banker or broker and
your financial advisor or tax preparer to help you decide if refinancing is the
right answer for you now.
Written by Blanche Evans
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