When interest rates go down, it can be very tempting to refinance. Sometimes this is a good idea, and sometimes it isn’t. Here is what you need to know to figure out if refinancing your home is in your best interests.
The first thing you need to do is to calculate how much you would save by refinancing. What would your new mortgage payment be? You can start with this number, because you can use it to figure out the rest of the numbers.
Let us say that in refinancing you will save $300 a month. That seems great, doesn’t it? Next, you need to calculate your closing costs. This is the amount in fees that you will have to pay to do your refinancing. An average number might be $5,000, although closing costs might be much higher for you. At a savings of $300 a month, it will take you about 17 months to recoup your closing costs.
In comparison, a savings of $200 a month with a $6,000 closing cost would mean that it would be 30 months before you broke even. It is important to make this calculation, because it will help you determine whether or not the numbers make sense. Will you be still living in your home longer than the time it takes to recoup the closing costs? If so, a refinance might be a good investment.
The other thing to determine is the length of the mortgage. If you have already paid down a couple of years on the loan you may wind up tacking on additional years of mortgage payment when you refinance. For example, if you currently have a 30-year mortgage and have been paying it for five years, then you have 25 years to go. Refinancing back to a 30-year loan means five additional years of mortgage payment.
If you can go from a 30-year to a 15-year mortgage, you would be in better shape.
The decision to refinance your home is a personal one based on your own financial and family situation. Do your homework first to determine if it is the right move for you.