As rates have dropped to historic lows, many people have refinanced their mortgage to take advantage of the lower rates. They are saving hundreds of dollars a month or even hundreds of thousands of dollars over the life of their loan. Many others are asking themselves “When is the right time to refinance their mortgage?” The conventional wisdom has been you need to lower your rate by at least a full percentage point. In reality it’s not that simple.
The decision of whether or not to refinance should be evaluated in terms of the “break even” calculation. How many months of savings does it take to recoup the cost of refinancing? Every refinance has certain closing costs charged by the lender, appraiser and Title Company. These costs range from about $1300 – $2200. When calculating a “break even” divide the total costs by the monthly savings. If the refinance costs $1500 and you’ll save $150 a month then your break even is $1500/$150 or 10 months. In this case it takes 10 months of savings to recoup the costs of the refinance. If you plan to be in the home for 3 years or more it makes sense to refinance. If your break even months is longer than you plan to live in the house then it doesn’t make sense.
If you have a large mortgage, over $200,000, saving just ½ % may be enough to result in a low number of break even months. Conversely if you have a small mortgage, less than $100,000, even if you lower your interest rate by 1% it may not save you enough to refinance.
Even if you don’t see a significant rate reduction there may be certain circumstances where refinancing makes sense.
- Refinancing an adjustable rate mortgage into a fixed rate mortgage
- If you are paying mortgage insurance you may be able to refinance into a loan without mortgage insurance and see a significant savings without a large reduction in interest rate.
- Refinancing a loan in which you are only paying interest into a fixed loan paying principle and interest will help you pay off your home.
To see if a refinance may be right for you call me today at (859) 539-5626. In about 10 minutes you can learn how much you can save.
BryanMay (NMLS# 13673)
Regional Manager
(859) 539-5626
bmay@cmcloans.com
CenturyMortgageCompany.com/bmay
Equal Housing Lender. Century Mortgage Company d/b/a Century Lending Company. NMLS# 3925, NMLS# 38658, NMLS# 38659. Information subject to change without notice. Information provided for educational purposes only. We are not providing legal advice, merely advising you of the general terms of some available programs. We have attempted to be as accurate as possible, but programs change frequently. Consult actual program details prior to closing. See your attorney or financial advisor for further guidance. Some restrictions apply. Subject to credit approval and underwriting. Information provided as-is only. This is not a commitment to lend. All calculations and comparisons discussed are hypothetical examples only. © 2010 Century Mortgage Company. All rights reserved. May not be reproduced,