When Does Refinancing a Mortgage Make Sense?
As of today, the average rate on a 30-year fixed mortgage is around 4.8 percent. These are the best rates we have seen in a long time, and they are encouraging many homeowners to try and refinance.
Home loan applications in general have increased over the last few weeks. In particular, refinancing applications are soaring right now. According to the Mortgage Banker's Association, refi loans will account for the majority of mortgage activity in 2009.
But before you try to chase the rates and refinance your home, you need to do your homework. Specifically, you need to find out (A) if you can qualify for refinancing, and (B) if it makes sense to refinance in your financial situation.
Many homeowners believe that a refinance loan always makes sense, as if it's a guaranteed way to save money. But this is clearly not the case. There are scenarios where refinancing would cost more (in closing costs) than the homeowner saves (through lower interest rates). So before you move forward with the process, you should run the numbers and determine if refinancing your mortgage makes sense -- financially speaking.
In some states, there are laws in place to prevent refinancing when it's not to the homeowners advantage. In other words, lenders are prohibited from making refi loans if the homeowner pays more than they gain. But not every state has these types of laws, so you must look out for yourself.
Within this context, the break-even point (BEP) is the point at which your costs equal you savings. In other words, the money you pay in closing costs on the refi loan are equal to the money you save via the lower interest rates. In order for a mortgage refinance to make sense, you must be on the positive side of the BEP. And in order to determine this point, you need the following "ingredients":
With these items, you can use a mortgage refinancing calculator to determine how long you must stay in the new loan (after refi) to make up for the closing costs. You'll know where your break-even point lies. This helps you determine if refinancing the mortgage makes sense in your situation.
Tip: You can find plenty of refi calculators online by doing a Google search for that phrase, and most of them are free to use.
Related articles on our site:
Average Cost to Refinance a Home
Getting the Best Rates on a Refi Loan
Home loan applications in general have increased over the last few weeks. In particular, refinancing applications are soaring right now. According to the Mortgage Banker's Association, refi loans will account for the majority of mortgage activity in 2009.
But before you try to chase the rates and refinance your home, you need to do your homework. Specifically, you need to find out (A) if you can qualify for refinancing, and (B) if it makes sense to refinance in your financial situation.
Many homeowners believe that a refinance loan always makes sense, as if it's a guaranteed way to save money. But this is clearly not the case. There are scenarios where refinancing would cost more (in closing costs) than the homeowner saves (through lower interest rates). So before you move forward with the process, you should run the numbers and determine if refinancing your mortgage makes sense -- financially speaking.
In some states, there are laws in place to prevent refinancing when it's not to the homeowners advantage. In other words, lenders are prohibited from making refi loans if the homeowner pays more than they gain. But not every state has these types of laws, so you must look out for yourself.
The "Break Even" Rule of Refinancing
Within this context, the break-even point (BEP) is the point at which your costs equal you savings. In other words, the money you pay in closing costs on the refi loan are equal to the money you save via the lower interest rates. In order for a mortgage refinance to make sense, you must be on the positive side of the BEP. And in order to determine this point, you need the following "ingredients":
- The remaining term (months / years) of your current loan
- The term of the new loan
- The interest rate of your current loan
- The interest rate on the new loan (after refinancing)
- The estimated amount of closing costs for the new loan
With these items, you can use a mortgage refinancing calculator to determine how long you must stay in the new loan (after refi) to make up for the closing costs. You'll know where your break-even point lies. This helps you determine if refinancing the mortgage makes sense in your situation.
Tip: You can find plenty of refi calculators online by doing a Google search for that phrase, and most of them are free to use.
Related articles on our site:
Average Cost to Refinance a Home
Getting the Best Rates on a Refi Loan
Labels: refinance
posted by Brandon at
9:49 AM
