Should I Refinance My Mortgage?
While not quite as low as they have been as recently as this spring, 30-year mortgage rates are hovering at 5.14% according of Bankrate (10/22/2009). My mortgage, meanwhile, is a 30-year fixed mortgage at 6.35%, or more than 1.2% higher than the current average. I could probably significantly lower my monthly mortgage payment by refinancing into a 30 or 40 year mortgage, but that doesn’t necessarily mean it’s the right decision for me. So should I refinance my mortgage? It depends on an array of factors.
Should I Refinance My Mortgage?
The decision to refinance your mortgage or not should come down to the numbers. I strongly caution against cash-out refinances to invest in other investments (rental properties or otherwise) unless you have the skill and experience to ensure your investments return more than your mortgage’s interest rate and you leave yourself a sufficient equity cushion (at least 20%). I do not recommend cashing out to fund consumer purchases under any circumstances.
Here are a few important questions you should ask yourself when pondering the question “should I refinance my mortgage?”
What’s My Credit Score?
Your credit score will determine the interest rate you qualify for. Your first move is to head over to myFico.com and pick up your FICO® Score & Credit Report
. If your credit score is 720 or higher you will likely qualify for the best rates. If it’s lower, you will probably pay more, perhaps significantly more. If your score isn’t quite up to par, there are things you can do to improve your credit score but unfortunately, they take time.
How Much Equity Do I Have?
The days of low- or no-money-down mortgages are over. If you don’t have at least 20% equity in your home (based on current value, not what you paid for it), you probably won’t qualify for the best rates no matter how good your credit is. It might still be possible to refinance your mortgage if you have 10-15% equity in your home, but you will pay a higher interest rate.
How Long Do I Intend To Stay In My Home?
It goes without saying you should refinance your mortgage if and only if the cumulative monthly savings is greater than your closing costs (2-3% of the value of your mortgage, on average). Generally speaking, if you do the math and your breakeven point is within 2 or 3 years and you plan on remaining in your home at least 2 or 3 years beyond that, it makes financial sense to refinance. Refinancing your mortgage can be a frustrating and time-consuming process, so make sure the savings are worth the amount of work involved.
What If I Have An Adjustable Rate Mortgage (ARM)?
Home-owners with adjustable rate mortgages (ARMs) are in a different boat. Even if it doesn’t make strict financial sense to do so, you might choose to refinance into a fixed-rate mortgage to lock in the low current rates and eliminate the risk that interest rates will head sharply higher sometime in the future. In this case, the risk of higher rates and ballooning future payments probably outweighs the short-term costs of refinancing.
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I came across an online calculator that is a bit more useful that the “typical how long will it take to repay the refi costs?” page. The link appears on this page: http://kalotay.com/calculators
- Bill
Go with a 15-year loan. 30-years to too long to commit to anything except a wife. You will still get 5.5 percent and will drastically decrease the amount of interest you will pay over the lenght of the loan.
Also, ask for a streamline refinance loan, which will save you about $2000 in closing costs.
I’m in a different situation. lol. My 5/1 ARM ends 1/1/10. It was 4.8%.. My NEW payment for 2010 will be at 3.12%, dropping my mortgage by $99mo. When I called the bank, they even asked, “why would you want to pay us 2500-3000 to refi at 5.29 for 30 yrs. when all you owe is 90k on the property?” lol On top of that, the property is only worth 66k, so the bank will only finance 80%. My financial adviser says, “you’re in better shape staying where you’re at and letting the loan readjust.” My monthly mortgage payment will be $499. PI
I forgot something…lol…By the time I would have paid the difference of the 20% cash to refi, the 3k to refi, and the difference in the monthly 5.29% from my new 3.12% for 2010, I would have to live here for YEARS just to break even. I’ll just keep paying the monthly plus some extra toward the principal ea. month.
Now would be a good time to refinance your mortgage. Rates are low. However, a word of caution. You should refinance if it makes economic sense. If you do refinance, opt for a 15 year term and by all means avoid going back to 30 years. Refinancing for 30 years defeats the purpose of the refinance.