When should I refinance my mortgage?
Posted by: Greg Fischer Post date: September 10th, 2009The rule of thumb years ago was to only refinance if you could lower your mortgage interest rate by at least two percent. This was a simple way to analyze the refinance, allowing customers to weigh the rough costs of refinancing. But there are a number of reasons to refinance that have little to do with rate.
Here are some of the most popular reasons to refinance:
Lower your monthly mortgage payment to improve cash flow
Lower your non-mortgage debt payments to improve cash flow
Switch from an Adjustable Rate Mortgage (ARM) to a fixed rate loan
Free up tax-deductible cash
Eliminate Mortgage Insurance (PMI)
What’s more important than the rate savings is the payment savings. Watch for your “break even” point. Break even is the cost of the refinance divided by the monthly savings. This is how many months you will need to be in the loan before you’ve really “saved money.” If your break even point is 3 years or less – and you expect to be in the loan at least that long – you’re probably looking at a good deal. If it’s shorter than that, you have a very good deal. Longer, consider if this makes sense as it’s put together now.
Don’t wait for a “magic” rate that may or may not ever happen. Have a goal (monthly savings, cash out or whatever) and if you see an opportunity to reach that goal – take it. People don’t refinance for rate – they do so for payment.
