| An old rule of thumb in the mortgage
business states that if rates drop by 2 percent,
then it's time to refinance . However, in today's
market, that's no longer necesarily true. If you're
planning to stay in your home for awhile and you
find a good deal on refinancing costs, it may
be worthwhile to refinance even when the difference
is less than 2 percent.
Refinancing involves many of the same steps and
the same types of closing costs you encountered
when obtaining a mortgage the first time around.
When refinancing a loan, the lender is required
to give you a "good faith estimate"
of closing costs, just as when you originally
bought, so make sure you get it.
Besides a lower interest rate, other reasons
for refinancing include converting from an adjustable
to a fixed-rate mortgage, or wanting to build
equity sooner by converting to a shorter-term
mortgage. Some homeowners may want to draw on
the equity they have already built to get cash
for a major expense, such as their children's
education.
Go to your current lender to discuss whether
you still can qualify for a loan. You may also
be able to negotiate the waiver of some fees,
such as a new appraisal or title search. Even
if you go to a new lender, these costs are always
negotiable. Some lenders offer "no-cost"
refinancing, but this usually involves a higher
interest rate.
In order to refinance, your home must have enough
value to justify a new loan. Many people who bought
homes at peak prices in the late '80s were disappointed
to learn that they could not refinance their homes
when mortgage rates dropped in the early '90s,
because the value of their homes fell and they
had little or no equity in their property. To
qualify for a lower-rate mortgage, they would
have to make a new down payment on the home in
which they're already living.
Does it really pay?
To figure out whether it pays to refinance, answer
a few questions and do some arithmetic:
• Figure monthly savings: How much would
you have to pay monthly under a new lower-rate
mortgage? (Use our mortgage calculators.) Subtract
the new payment from your old payment to find
out the monthly savings.
• Figure total cost: What is the total cost
to refinance? Add up the costs of any points and
other fees on the loan, title search, and new
appraisal.
• How many months will it take to break
even? Divide your total cost by your monthly savings.
Example: Let's say the total cost of refinancing
is $3,000, and your monthly payments on the new
loan are $150 lower. It will take you 20 months
to break even. If you don't plan on staying in
the house that long, it won't pay to refinance.
You can do a detailed analysis of what will work
in your situation with our refinancing calculators.
|
