Refinance Considerations

You may be wondering whether you’re a good candidate for refinancing and if so whether it’s the right time to do it. “If you can reduce your mortgage interest rate by ½ percent to ¾ percent and if you expect to be in the house more than three years, then it makes sense to look into refinancing,” says Greg McBride, senior vice president and chief financial analyst for Bankrate.com. There is a break-even period and it will vary depending on the loan. Typically, after three years you start to reap the benefits of refinancing. Ask yourself, “Are you going to stay there or own the home long enough to take advantage of the refinancing?” says Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association. Another key factor is the cost of refinancing.

“See what else besides the rate is added to the mix,” McBride says. Most often, borrowers roll these costs into the loan amount. Other reasons to refinance are: to take cash out of your home for debt consolidation or to complete home improvement projects or to change the kind of loan you have. For example, if you have an adjustable-rate mortgage, you may prefer to change it to a fixed-rate loan so you won’t face larger monthly payments if the rate adjusts higher after its initial fixed period. The bottom line–If it’s a smaller loan amount, even if you will get a rate reduction, it may not be worth it. Your savings depend on the loan amount and the rate drop. Smaller loans need a bigger rate drop to produce savings.

Source: The Washington Post