Should You Refinance?
When mortgage interest rates drop, buyers can afford more home than they could purchase when rates are higher.
And sellers benefit, too, because low rates make their house affordable to more prospective buyers.
But what if you are planning to stay put for a while? You may consider taking advantage of lower rates to refinance your existing loan so you can reduce your monthly payment. Here are three factors to consider when making your decision:
1. Shop around. Find out what rates are currently available to you, but be aware that interest rates change daily. Look at the different types of loans available as well.
2. Do the math. Subtract the new, lower monthly payment you would have if you refinanced from your current principal-and-interest payment. Figure how the new interest rate will affect your income taxes. On existing loans that are only a few years old, the amount of interest you pay this year may be lower after refinancing, thus reducing your tax deduction. On the other hand, on an older loan, your interest expense may be higher for the first few years, resulting in a bigger tax deduction.
Add up closing costs, and then subtract a bigger tax deduction or add in a bigger tax bite. Now divide your total costs by your monthly savings. The result tells you how long it will take to recoup the costs of refinancing.
For example, if your new loan payment is $50 a month lower, and you paid $2,300 in fees to refinance, and will pay about $300 less in taxes, your net cost is $2,000. It will take you 40 months to come out even.
3. Consider other options. Some lenders offer no-fee refinancing, in which fees are rolled into the loan for a slightly higher interest rate. Another option is to get your lender to restructure or modify your existing loan to a lower interest rate. Many lenders prefer to restructure rather than lose a valuable customer. Fees are usually lower when you restructure your loan.
Consider a longer-term ARM (adjustable rate mortgage) if you plan to move in the next few years. The rates are usually lower than for a 30-year fixed-rate mortgage.
If the numbers just don't add up,
it may be better for you to sell your current home and buy another. Give us a call to find out more.