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Finances in 55 Seconds: Should You Refinance?

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Monopoly Houses & HotelsWith mortgage rates so low, it can be a great time to refinance your home. Indeed, I am thinking about refinancing my home to save money on the payments. I wouldn’t extend my mortgage out longer; I’d just refinance for the reminder of my mortgage right now, with a lower rate. That would help me build equity faster, and it would save me money in interest charges over my loans maturity.

Refinancing can also be a good way to improve your cash flow. For those who are having difficulties, but haven’t yet missed a payment or seen a drop in credit score, it is possible to get a lower payment if you refinance to a lower rate. If you are trying to decide whether or not to save money on your home, you can do so in less than 55 seconds by answering the following questions:

  1. Have you refinanced recently?: If it’s been more than two or three years since you last refinanced, it might be worth it to consider refinancing again. If you just recently refinanced, paying the costs associated with refinancing might not be worth it.
  2. Is your new rate likely to be more than 1% less than your current rate?: The current rule of thumb is to refinance if your new rate will be at least 1% less than your current rate. If you will save that money, you might find it worth it to refinance. If the drop in interest rate isn’t so big, you might not recover the costs of refinancing.
  3. Will you be in your home for a little while longer?: Another consideration is how long you will be in your home. If you plan on moving within the next two or three years, you might not recover the costs associated with refinancing. However, if you plan to be in your home for at least five to seven years, there is a better chance that you will be able to make up for costs.
  4. How does your credit look?: Be honest. Is your credit in good shape? You can check your credit report to make sure that it is accurate, and to find problems that could drag your score down. If you don’t have good credit, you might not get the best interest rate, and that means that your rate may not be low enough to make refinancing worth it.
  5. How much equity do you have?: In some cases, without sufficient equity, you won’t be able to refinance. However, if you aren’t doing a cash out refinance, and if you qualify for a program for those whose loans are serviced through Fannie and Freddie, you might be able to get a refinance, even without a great deal of equity in your home.

It doesn’t take very long to do a quick review of those questions, and then decide whether or not it makes sense for you to refinance. Run down the list, and consider your situation. Then, when you are ready, you can call around to get some quotes on refinancing. Make sure you know roughly how much your home is worth, as well as the balance of your current mortgage. Try to provide specifics so that you can get comparable quotes.

(Photo: wwworks)

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4 Responses to “Finances in 55 Seconds: Should You Refinance?”

  1. Jared says:

    Good article, overall, though I’m not sure I agree with Point #1. Closing costs from your existing mortgage are sunk costs; you paid them and there’s no changing that fact. Sure, paying closing costs a second time isn’t fun, but you shouldn’t be afraid of them if you’re saving enough money in the long run.

  2. LovePrepaid says:

    You also need to consider how many years are left on the existing mortgage. Plug in the numbers so you can see what you pay out for your remaining years and what the total payout on the new one will be.

  3. I’m not sure how relevant the old “1% drop in interest rates” is any more. For example, refi costs on a 200K mortgage and a 100K mortgage are going to be pretty similar. However, a 1/2 point drop for a homeowner with a 200K mortgage will reduce monthly costs as much as a 1 point drop on a 100K mortgage … meaning that the break-even number of months for those two scenarios would be about the same.

    I always calculate the number of months it will take to break even.

  4. Re-fi or not re-fi says:

    Any advice?
    Two early 60’s, married, retired people, with a very high credit rating, no credit card or other financed debt,except the house, owe $66,000.00 on a 30 year, fixed rate at 5%, not moving, but could use the $400.00 a month mortgage payment for probably increased Obama-care cost or other things, R.E taxes, etc., would a re-fi be advisable or smart now? And what’s the best way, I’ve heard a “HELOC” is probably the best way, but I don’t know!

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