Should I Refinance in today’s market?

Should I Refinance in today’s market?

Probably the most optimal time to get a refinance on your mortgage is when you can improve your mortgage terms and lower your cost of borrowing. If you are not improving the terms of your mortgage and you are not actually lowering the cost of borrowing, then it’s not a good idea to refinance.Does the lower interest rate you can get at this time make financial sense? The old rule of thumb was called the 2% rule which stated that if the new interest rate is 2% less than the old interest rate, then it is worth it to refinance. This rule is really too broad and should be disregarded, however.

Should I refinance? Rather, first of all you need to figure out how long you are likely to live in the home. If you think it is likely that you will be moving in a year or so, forget about refinancing your mortgage. On the other hand if it is probable that you will be staying in the home for two years or longer, then refinancing could make sense. Another assumption here is that you have enough equity in the home such that you will qualify for a refinance. If you have been in the house for a number of years this is probably the case. Remember, however, that home values have gone down in most areas of the U.S. over the past couple of years. You need to be able to borrow enough money to pay off the balance of your old mortgage, and you will most likely be able to borrow only about 80% of the current value of the home.

At this point you need to figure out how many months it will take to pay off the costs of obtaining a new loan.

You can make a rough estimate of this by calling up a mortgage broker and asking him or her how much it will cost to refinance your mortgage. If you want an exact figure you will need to submit a loan application to a lender and get a Good Faith Estimate. Once you have a handle on how much it will cost to refinance, then you need to know what your monthly payments will be under the new loan terms. Subtract this monthly payment figure from what your current mortgage payment is, and you will know how much you will be saving each month. Divide this figure (projected monthly savings) into the total loan cost, and you will then obtain the number of months it will take to pay off the costs of obtaining your new loan. This is called the break even period. In most cases if that figure is 24 months or less, then refinancing will probably make sense, assuming you will stay in the house that long.

This is the basic calculation when considering the refinance of a mortgage. There are other factors as well that could justify refinancing, such as changing from an adjustable mortgage to a fixed rate mortgage, changing from 30 year to 15 year payoff to pay off the mortgage faster, or to withdraw equity to pay off high interest debt like credit cards, for example.

Since he retired from the military, Marc hasn’t found meaningful employment and things are starting to get tight financially. To help with his monthly cash flow, should he refinance to lower his mortgage payments?

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