As a savvy homeowner, you already know that a home refinance involves more than simply taking advantage of a lower rate. There are potential costs involved, and they must be weighed against the benefits.
We’re here to show you how to analyze both the expenses and the gains to verify when (and if) you will truly benefit from your home refinance.
Know what your current interest rate is and what loan program you are on.
Before you can decide whether or not it makes sense to refinance, you must know the details of your current situation. Your current loan terms are essential in determining the potential financial benefit of refinancing.
Once you have this information, you can start researching current rates yourself or contact a lender to see what current rate options are available.
Compare current rates with your existing situation.
Conventional wisdom used to be that you needed a 1% or 2% drop in interest rate before a refinance made sense. While this may be true for a select few situations it is by no means applicable to everyone. There are many more factors that need to be considered when determining whether or not rates are at a level that make sense.
A more important consideration is determining how long it will take you to break-even on the costs of refinancing when compared to the interest savings you get. There are a variety of rate and cost options available when refinancing so applying a 1% rule of thumb to all situations doesn’t make sense. For example, if you decide to go with a no point and no closing cost loan option, you would not need the same percentage decrease in rate as if you paid 1 or 2 points and had several thousand dollars in closing costs.
Similarly, someone with a $100k loan amount will need a much larger decrease in rate vs. someone with a $400k loan amount to see the same monthly interest savings.
A better rule of thumb to follow is that you want to make up the costs of refinancing within 2-3 years of the refinance with the monthly interest savings. The faster the break-even point the easier your decision.
For example, if a client has a $400k loan amount and they are able to lower their rate by .500% on a 30 year fixed with closing costs of $2,000 they would recover their costs within 1.5 years and save over $100 in interest per month, making the refinance beneficial. Conversely, if a client has a $100k loan amount and they are able to lower their rate by .500% on a 30 year fixed with closing costs of $2,000 it would take almost 6 years to recover the costs and they would save under $30 per month in interest, which would not make sense.
If you want assistance in determining whether or not you should refinance, an experienced mortgage professional can easily calculate your break-even point for you and provide you with details on how much interest you could potentially save.
Master the entire refinance process to maximize the benefit.
There are a number of other things to learn in order to get the most out of a refinance. Check out our ebook Time The Market: When To Refinance And Lock A Rate in order to really leverage refinance knowledge into a financially sound decision.