How to Know if it’s Time to Refinance

 In Refinancing your Mortgage

Interest rates are very low at the moment, and many people are refinancing their current mortgage.  The most common reasons are to lower the payment, to get some money for home improvements, and to consolidate other high-interest rate debt, like credit cards. But how do you know if it’s time for you to refinance?  Here’s a great way to tell if it makes financial sense to refinance.

Decision Making

Refinancing your mortgage should be a financial decision, not an emotional one.  The decision should be based on numbers, and nothing else. But many people are put off by numbers (remember the fear of getting called on to figure out a problem on the chalk board in math class?).  

Well, we are here to straighten it all out for you. Here’s how to do it:

If you want to lower your mortgage payment, all you have to do is have us tell you how much you are going to be saving each month, and how much the closing costs are going to be.  Then divide the costs by the savings, and that will tell you how many months it will take for you to break even. If you are sure you are going to keep the house for longer than the break-even point, then it makes sense to refi.  If you aren’t going to keep the house for longer than it takes to break even, do not refi.

An Example

Here’s an example.  Let’s say you are going to save $250 each month by refinancing, and the closing costs (including any points you are paying to get a lower interest rate) are going to be $3,500.  Divide 3,500 by 250, and you get 14. So, it will take you 14 months, or 1 year and 2 months, to break even. If you are going to keep the house for longer than 14 months, then you should refinance.  If you plan to sell the house before 14 months, do not refinance.  

So how do you know if it’s time to refinance? If you are going to take some money out of the equity you have built up in the house for home improvements, debt consolidation, or some other reason, it almost always makes sense to refi because mortgage interest rates are so low, the interest you will pay with a mortgage will probably be less than it would be with any other kind of financing.  If the amount you need in cash is very small, it might not make sense to refinance, but all you have to do is call us and we can figure it out for you.

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