Deciding
to Refinance Your Mortgage
Traditionally,
the decision on whether or not to refinance your mortgage has
meant balancing the savings of a lower monthly payment against
the costs of refinancing. But in recent years, companies have
introduced "no-cost" and low-cost refinancing packages that completely
eliminate or at least minimize the out-of-pocket expenses of refinancing.
(These refinancing packages compensate with a higher interest
rate, or by including some of the costs in the amount that is
financed.)
With traditional
mortgage refinancing, the most often cited rule-of-thumb is that
the interest rate for your new mortgage must be about 2 percentage
points below the rate of your current mortgage for refinancing
to make sense. However, with the newer low- and no-cost refinancing
programs, it can be worth your while to refinance to obtain a
smaller reduction in interest rates.
How long you
expect to stay in your home is also a factor worth considering.
If you'll be moving in a few years, the month-to-month savings
may never add up to the costs that are involved in a refinancing.
Mortgage
Refinance Costs
When you refinance
your mortgage, you usually pay off your original mortgage and
sign a new loan. With a new loan, you again pay most of the same
costs you paid to get your original mortgage. These can include
settlement costs, discount points, and other fees. You also may
be charged a penalty for paying off your original loan early,
although some states prohibit this. The total expense for refinancing
a mortgage depends on the interest rate, number of points, and
other costs required to obtain a loan. To obtain the lowest rate
offered, most mortgage companies will charge several points, and
the total cost can run between three and six percent of the total
amount you borrow. So, for example, on a $100,000 mortgage, the
mortgage company might charge you between $3,000 and $6,000. However,
some mortgage companies may offer zero points at a higher interest
rate, which may significantly reduce your initial costs, although
your payments may be somewhat higher.
Analyze Your
Savings
Check the
market closely to determine the available home loan and mortgage
rates, as well as the costs associated with refinancing. These
costs can include items such as an appraisal and other various
fees and points. Then determine what your new payment would be
if you refinanced. You can estimate how long it will take to recover
the costs of refinancing by dividing your closing costs by the
difference between your new and old payments (your monthly savings).
However, the
ultimate amount you may save depends on many factors, including
your total mortgage refinancing costs, whether you sell your home
in the near future, and the effects of refinancing on your taxes.
As mentioned above, the old rule of thumb used to be that you
shouldn't refinance unless the new interest rate is at least two
percentage points lower. However, many companies are now offering
zero point loans and low-cost refinancing. Therefore, even if
your rate change is less than one percentage point, you may be
able to save some money by refinancing your mortgage.
Nathan
Toler is Vice-President of Internet Operations for Sharp Mortgage
Group, a zero-down home mortgage specialist. Click here for more
about
VA home loans and VA mortgage refinances. |
