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When Should You Refinance?

With mortgage rates at historical lows, you may have heard friends, family, or coworkers talking about how they’re taking advantage by refinancing their existing mortgage. Does this mean that everyone with a mortgage should call their favorite mortgage broker and demand a refinance? Not necessarily. The truth is a refinance doesn’t necessarily make sense for everyone. To clear up the confusion, we’ve provided a few key indicators to help you identify if now is the right time to consider a refinance.

refinance mortgage

You plan on living in your home for at least another 36 months

The general rule of thumb states that you want to be able to cover all of your closing cost in less than 36 months of payment savings. If you’re moving in the next 36 months or less, refinancing is counter intuitive. The math is easy to calculate, just take your total 3rd party fees (closing cost) and divide it by the monthly payment savings. If that number is more than 36 months it probably doesn’t make any sense unless this is the last house you plan on purchasing.

You have enough equity in your home and can now drop Mortgage Insurance

If you put less than 20% down on your home (FHA or Conventional) then you most likely are paying monthly mortgage insurance. Since FHA Loans require you to pay a monthly mortgage insurance premium (MIP) for the life that loan, it’s highly recommended to refinance once you reach your 20% equity in your home. If you happen to have a Conventional loan with private mortgage insurance (PMI) that you believe to have increased significantly in value, then refinancing your property with an updated appraisal could be a strategic way to drop your PMI several years ahead of schedule.

You can lower your rate by more than half a percentage point

You would be surprised by how big an impact half a percent can make on a 30-year mortgage. Let’s say you have a $350,000 loan with 3.75% interest rate and are considering dropping this by .05 to 3.25%. Your monthly payment would immediately drop by $98 per month. That’s $5,880 saved over the next five years and $35,280 over the life of the loan. As long as your closing costs are recouped by your monthly savings in roughly 36 months, it’s no brainer.offering money

You could benefit from having a lower monthly payment

For many people a lower monthly payment could help alleviate financial stress or free up resources to pay off other debt. Life affects us all in different ways and if you see yourself struggling to make your payments in the future, lowering your rate or extending your loan term may be a simple way to reduce your monthly expenses.

You want to pay off your mortgage faster and keep a similar monthly payment

When homeowner’s take advantage of falling interest rates, they also have the option to change their loan term. Depending on your situation, a refinance could be an easy way to payoff your mortgage ahead of schedule to little effect on your monthly payment. For example, a $200,000 loan with a 5.5% interest rate and a 30-year term will have a monthly payment of $1,136. By refinancing to a 20-year mortgage at a 3.25% rate, the monthly payment will drop to $1,134. This mortgage would be paid off 10 years sooner and have a lower monthly payment. It doesn’t get much better than that!

 

 

When Should You Refinance? | Rock Mortgage — Houston, Texas