The question of when to refinance or even if to refinance has plagued homeowners for years. Millions of people around the country have to take out mortgages on their homes because they are not able to come up with the entire purchase amount for the home that they are buying. A mortgage is a loan, but it’s oftentimes viewed as “good debt” because the loan is on a piece of property that will potentially increase in value over time. For this reason, it is recommended to have a mortgage to help build your financial stability and to establish your credit. Once you have purchased your home and closed on your mortgage you may begin to think about refinancing your home to get a better interest rate. There are a few key points that you should consider when evaluating whether it is the right time to refinance or whether you should wait.
The best time to refinance your home is when you can refinance your mortgage to take advantage of a lower interest rate that will lower your monthly payments. To determine whether it’s a good time to refinance you will need to do a simple calculation to see how long it will take to recoup the expenses that it will cost you to refinance.
Let’s take a very easy example to see if a person would be better served to refinance their mortgage or not. Our example is a mortgage on a home for $100,000 at 6.00% interest. This person has a mortgage for a term of 30 years. The monthly payment for this mortgage would be $600. For our example, let us say that the person has been living in their home for 5 years, so they have 25 years left on their loan, and they are able to qualify for a new lower interest rate of 4.5% if they refinance their mortgage and move it to a new loan company. The biggest question that this person will need to find out is how much it will cost them to refinance. Just like when this person closed on their original loan there are a lot of fees that must be paid to complete a refinance. There might be origination fees, points, appraisal fees, attorney fees, title insurance, or inspections. All of these fees could add up to thousands of dollars. Let’s pretend that this person’s fees would total $1500.
Our next step is to run the numbers. What we find is that when this person does a refinance their monthly payment lowers by about $133. With this lower monthly payment, this person in our example is able to recoup their costs for the refinance in exactly 12 months. If this person intends to stay in their home for longer than 12 months, they will save money by going through the refinance process. Additionally, if this person stays in their home for the remaining life of their loan, they will save over $12,000 in interest because of the lower interest rate.
Rates are at historic lows right now so it would behoove you to run this exact scenario for the current state of your mortgage if you have one to see what rate you might qualify for, and then to see how long it will take you to recoup the cost that you will pay for your refinance. If you plan to stay in your home longer than it would take you to recoup the cost of the refinance, then it is generally a wise decision to go through with the refinance. These steps will help you make the best decision for your situation!
Keith Munsell 
