What does “refinance” mean and when should I refinance?

There used to be “tall tale” that said “a good time to refinance when mortgage rates are approximately 1.5-2.0% lower than your CURRENT rate on your mortgage. “ This just isn’t true !

There are many factors to consider when deciding to refinance your mortgage, lowering the interest rate is just one of them.

It may be a viable option to refinance even if the difference in interest rate is 1% or less. If interest rate and loan payment reduction is your motivation, the decision to refinance is a very simple formula. First and foremost, you need to know how long you plan on staying in this home in order to figure out if the monthly savings on the new payment will be enough to recoup the closing cost associated with this refinance. For example, if your proposed monthly principal and interest payment is $200 cheaper than your existing principal and interest payment and your closing cost are $3,000, you would divide your closing cost by your monthly savings to figure out how many months you would have to live in the property to break even. In this example, $3,000 divided by $200 in monthly savings equals 15 or 15 months. If you plan on staying in the home for more than 15 months; than based on the above example, refinancing would be the right decision. In most cases if you plan on selling your home in the next 12 months, refinancing is typically not a wise decision as you most likely will not recoup the cost associated with the refinance in this short period of time.

Ultimately, your savings from refinancing depend on certain qualifications and factors, including: the loan amount, reduction in interest rate, closing cost and loan term.

Some other examples that make refinancing the right decision are as follows:

  • Removing a spouse from the mortgage loan and deed in a divorce
  • Shortening the loan term
  • Taking cash out for home improvements, tuition, vacation or any worthwhile reason.
  • Using your equity to purchase another property
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