Mortgage rates continue to be low, and it’s got to be tempting to refinance your house. The answer to whether or not you should go ahead with that refinance comes down to simple math – can you save more out of refinancing than you would if you would if you kept your existing mortgage?
To calculate this, you need to know how much in closing costs the lender is going to want for the refinance. Then, you’ll calculate the monthly savings between old and new mortgages. Divide the cost of the refinance by the savings, and you’ll have what is called a breakeven point. So, if the closing costs were $2,000 and you saved $100 a month, your breakeven point is 20 months. If you’re going to be living in your house for more than 20 more months, then it’s worth doing the refinance.
Here are a couple more things to think about when looking at a refinance:
Try to shorten the term. If you have a 30 year mortgage, aim to refinance to a 15 year mortgage. Get the term as short as you can possibly afford. The interest rate will be lower, and you’ll get the mortgage paid off a lot sooner.
If you have an adjustable rate, move to a fixed rate. There is no telling what’s going to happen to the economy, but there isn’t much room for rates to go down. You’re setting yourself up for a bad surprise if you go for an adjustable rate, so aim for a fixed rate unless you’re CERTAIN you’re moving in a few years…at which point, it’s probably not worth doing the refinance in the first place.
While people try to come up with tips and tricks for dealing with the refinance question, it’s really just a matter of simple math. Take the couple of minutes that are required to do the math correctly so that you can answer the question yourself and come up with the right answer for whether or not to refinance your home.