Is Refinancing Your Home Mortgage Right For You?

by Sara Peak

With home mortgage rates at historical lows many people are wondering, “Should I refinance my home mortgage right now?”  The answer depends on a number of factors many of which are more than just the rate of the new loan. 

home-refinance-mortgageWith rates changing daily, experts do not recommend trying to time the market to lock in the absolute lowest rate.  Instead, your decision should be based around a number of factors. 

One important factor is recapture.  Recapture is how long will it take to regain in savings the amount you spent on closing costs.  You should consider how long you are going to live in your current home when deciding if refinancing your home is right for you.

For example, if closing costs are $2,500 and you save an additional $50 per month on your mortgage, it will take you 50 months to reach your “breakeven point.”  If you plan to stay in your home for many years, a reduction of just a few points in your interest rate could end up saving you thousands of dollars over the life of the loan.  If you plan on moving before your “breakeven point”, now might not be the time to refinance regardless of how sexy the rate looks.

Ask your loan officer to run the numbers for you. They should be able to offer you a comparison of your current verse proposed loan schedules.  Ask, “How much will I save per month by refinancing?  How much will I save over the life of the loan?” Other questions to consider include, “Can I afford to make extra payments toward my mortgage?” If so, it may be beneficial to make extra principal payments to reduce the balance of the loan rather than re-finance.

Also consider if by refinancing you will reduce your risk by paying off risky products such as adjustable mortgages, equity lines which are adjusting, or eliminate PMI (private mortgage insurance).  Does refinancing accomplish your goals of monthly savings, lifetime interest savings, or home improvement? 

Rates change daily, but they are still at historical lows.  Do not be pressured or rushed into refinancing before you consider the true cost associated with your potential savings.  You have time to make your decision.  You should consider it, but consider it thoroughly.

This is a weekly featured post on Own The Dollar from Sara Peak, a Certified Financial Planner and a veteran of the finance industry. In addition to her monthly “Money Matters” column in Kentucky Living magazine, she also writes about money and personal finance topics on her blog.

Be sure to look for more great featured articles every week from Sara.  If you have a question or topic that you would like for her to discuss, please contact us.

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{ 1 comment… read it below or add one }

B Simple December 5, 2009 at 11:27 pm

Nice post. Like the fact that you do not just focus on the rate. There is more to refinancing than just the rate. Like you stated how long will it take to recoup your closing cost. You should also consider how long will you live in the house, what will the home appraise for, and what type of mortgage do you currently have? All of these are questions you should ask yourself prior to refinancing.

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