When Does Refinancing Make Sense?
Monday, August 2nd, 2010
Kind of a silly question, right? Most people think refinancing makes sense whenever the rate is lower. I would concur, but the question is, how much lower does the rate need to be to make sense?
General rule of thumb — rate should be at least 1% lower, but usually 1 1/2% lower is the best financial move. But why? The rate is lower, so you’re saving money; seems to be a no-brainer, right? Here’s the deal. A refinance costs the same as purchasing a home. Though you can do a no-cost refinance, you’re still paying for it by paying a higher rate.
No-cost means the lender costs are covered by the rate. You still have title company charges, county fees, as well as the initial deposit for your taxes and insurance escrow. The good news is you may essentially get reimbursed for all or a portion of the initial deposit when you receive a check from your old mortgage company with the balance of your previous escrow account. This happens about 3-4 weeks after your refinance closing.
When looking to refinance, it’s best to get a copy of a good faith estimate or cost analysis to really determine if this financial move is a reality. Many loan officers will give you the payment to entice you to do business with them. The payment is absolutely an important piece to consider. It’s what drove you to consider this, right?? It someone tells you what you want to hear, you just may lock that rate.
You need to know more which is why you need the estimate. Here are some questions to consider.
- How much are the lender’s costs?
- How much are your yearly savings?
- How long do you intend to stay in your home?
- Do you have more than one loan against the home?
- Will your home value support a refinance?
These are just a few questions to ponder. It’s my goal to tell it like it is — if a refinance makes sense, then I am all for helping you out. If it’s not, then let’s talk about what may make sense — paying extra, going to a shorter term or just staying put. Just know, your financial well-being is my top priority. It doesn’t benefit me to give you bad advice.
