How do I know if I should refinance?

The question we’ve been asked the most frequently since we started issuing mortgages has been: How do I know when it’s time to refinance? Old conventional wisdom said it should be done when rates drop 2% below your current mortgage, but this rule of thumb is too simplistic. The higher your loan balance, the smaller the percentage difference in the rate for the closing costs to be worth it. Due to inflation, the median home value and therefore the median mortgage balance today is much higher than in the past. If you live in a high-cost area, your mortgage probably has a higher balance. Additionally, closing costs can vary widely from state to state, with New York, for example, considered a high closing cost state according to the Federal Housing Authority (FHA).

There are several things to consider when deciding whether to refinance:

1. Monthly savings that will come from lowering the rate. It is very important to do the math for your specific situation. Taxes and insurance stay the same because they don’t depend on whether or not your loan changes, but still look at your full monthly payment in case the payment increases.
2. If there are any type of prepayment penalties or early closing fees applicable to your current mortgage (s), including any second mortgages or home equity loans / lines of credit. You need to get out your closing papers and read the details. Don’t trust your memory of the last transaction, re-read your documents. We’ve found that people’s memory of old transactions is often not as good as they think, and if we don’t help you with the latest transaction, we won’t know without looking at your documents. We will always be happy to review them with you if you want. Just because some early closing fees apply doesn’t necessarily mean a refinance isn’t worth your money. A good mortgage broker can help you decide when a refinance is recommended based on the specifics of your situation.
3. Your closing costs, which can vary based on: whether a “streamlined” refinance is possible and worthwhile, whether your property is a cooperative, whether it is an investment property, whether a no-closing-cost loan is available to you. (link to the page that explains the difference between closing costs and prepayments)
4. How long it will take to pay your closing costs.
5. When the property is likely to sell. If you don’t know, try to estimate the earliest time you think you will sell and the longest time you expect to have. If you are going to sell before you recoup your closing costs, it is not worth doing.
6. How long it will take you to own the free and clean property.
7. Factors other than the rate: These generally must occur in conjunction with a rate decrease to get the maximum benefit for you, but they can make a refinance more valuable: cheaper cash for improvements or shorten the term to finish your loan before weather. A few words about debt consolidation: This may be worth it, but keep in mind that if you take on credit card debt again, you will have a bigger mortgage. Y credit card debt.

Reasons not to refinance:

1. Merely for the tax deduction without any other benefit. Why pay $ 100 in interest just to pay $ 30 less in taxes? You’re still $ 70 poorer.
2. For the rate, but without taking into account the “big picture” savings in dollar terms. This is generally true if your balance is extremely small and you don’t need cash.
3. If you probably aren’t going to own the property long enough to recoup your closing costs, check out the discussion above (or link to the same page)

Also, if you are considering getting an adjustable rate mortgage (or ARM) (whether you currently have one or not), check out this site for my article titled How would an adjustable rate mortgage affect you?