How do you know when to refinance?

With rates trending down again a lot of people are asking this question.  The best answer I can give you is “When It makes sense for YOU”.

How much you need to lower the rate from your current rate depends to some extent on the size of your current mortgage. The larger the loan the less you need to reduce the rate in order for it to make sense. If you have a $900,000 mortgage and you drop the rate 1% that could amount to about $9,000.00 the first year in savings, The same drop on a $90,000 loan is $900 a year, or about $75 a month. Still real money, but far less compelling, especially if there are closing costs. 

You should probably look at overall cost in addition to cash flow. And decide how important each of those is. Cash flow is important because it is what most affects your day to day living. This is why most of us opt for a 30-year mortgage even when a 15-year mortgage is much less expensive. 

What are your plans for the future? In other words, how long are you likely to reap the benefits of the new loan? I’ve seen people refinance for a nominal savings because they planned on being in the home- and the loan- for a very long time. Someone with a shorter horizon may want to pass on a loan that may not yield much benefit over the time they intended to have the loan? 

What if I Don’t’ know??? WHAT ABOUT A NO COST MORTGAGE? If you are unsure you may want to go with a low or No cost option. It is often possible to get a mortgage and have the lender pay all your loan costs, title, & escrow fees. This way you are profitable from day one and there is no risk of loss. They don’t do it for free, of course. The interest rate will l undoubtedly be higher, so it's really not "no cost", but you won’t have to pay closing costs out of pocket or add them to your loan balance. Its a great option to have!

What if you can’t reduce your rate much with a new mortgage? Maybe look at a HELOC (Home Equity Line of Credit) These are essentially secured lines of credit, usually a 2nd mortgage that you can access when you need it and pat off when you don’t. The closing costs are generally low, and they are usually indexed rates, so I don’t recommend them for large amounts. You can refinance later and combine the HELOC into one loan for an overall lower rate if interest rates drop.

The decision to refinance is always a personal one based upon your particular situation. A consultation with a mortgage loan professional is definitely a good idea. A good originator will explain you your best options and make some recommendations and we won’t recommend that you refinance if it doesn’t benefit you.

 If this is something you'd like to discuss, please give me a call! 800-230-4621