Knowing When to Refinance
April 2, 2018
When a borrower is looking to refinance, it is often hard to decide if it is worth the expense. According to the Federal Reserve, the average closing costs for a mortgage refinance can range from 3 to 6 percent of the loan amount. This can get quite costly, especially for mortgages over $100,000. It is always a good idea for a borrower to negotiate any closing costs with the lender, in order to receive the best deal in the long run. Lenders typically have a few suggestions to help borrower make a solid decision on refinancing.
First and foremost, the borrower needs to look at the current interest rate versus his mortgage interest rate. If the difference is at least one full percentage point, it is worth considering the refinance. However, if it is 2 or more percentage points lower, the borrower should seriously consider refinancing. This difference in interest rate could save him thousands over the life of the loan.
Next, the borrower should consider his break even point on the refinancing closing costs. The borrower should ask the lender for a Good Faith Estimate, which outlines the closing costs associated with loan. He should take the total closing costs and divide it by the amount of savings in the monthly payment each month. For example, if the mortgage will cost the borrower $3,000 to close and it save him $200 a month, it will take him 15 months to break even. It is usually a good idea to refinance if the break even point is within 2 years, or 24 months of the refinance’s closing date.
Lastly, the borrower needs to consider the length of time he is planning on being in the residence. If the borrower is not going to be in the residence long enough to break even on the closing costs, or will break even within a year of a planned move, refinancing is probably not in his best interest. Additionally, if the borrower is looking to refinance from a variable or adjustable rate mortgage to a fixed rate product, this is only a good idea if the rate will be fixed in for a considerable length of time before an eventual move.