When Should I Refinance?

It makes sense to refinance a home when it will save you money or make paying your monthly bills easier.

Some experts say you should only refinance when you can lower your interest rate, shorten your loan term or both. But it depends on your situation. Some homeowners may need short-term relief from a lower monthly payment, even if it means starting over with a new 30-year loan. Refinancing also can be the means to help you access the equity in your home or get rid of an FHA loan and its monthly mortgage insurance premiums.

When you refinance, you get a new mortgage to pay off your existing mortgage. Refinancing works just like getting a mortgage to buy a house. You’ll be free from the stress of home buying and moving though, and there’s less pressure to close by a certain date. Further, if you regret your decision, you have until midnight of the third business day after your loan closes to cancel the transaction.

How Long Does it Take?

In September 2020, the average time to refinance a loan averaged 54 days, according to Ellie Mae’s Origination Insight Report. When interest rates drop and many homeowners want to refinance, lenders get especially busy and refinancing can take longer. Refinancing an FHA or VA loan can also take up to a week longer than a conventional refi.

Refinancing can lower your monthly mortgage payment by reducing your interest rate or increasing your loan term. It can also lower your total interest costs with a lower mortgage rate, shorter loan term, or both, and possibly eliminate mortgage insurance.

Closing costs such as the origination fee, appraisal fee, title insurance fee and credit report fee are always an important factor in deciding whether to refinance. These costs typically amount to 2% to 6% of the amount you’re borrowing.

Know Your “Break Even”

You’ll need to know the loan’s closing costs to calculate the break-even point where your savings from a lower interest rate exceed your closing costs. You can calculate this point by dividing your closing costs by the monthly savings from your new payment.

Forbes suggests a break-even period of 25 months is usually fine, and 50 might be, too, but 75 months is probably too long. There’s a good chance you will refinance again or sell your home in the next 6.25 years. Between 1994 and the first quarter of 2020, the median number of years a borrower has kept a mortgage before refinancing is 3.6 years, according to Freddie Mac.

If you think your new loan will be your last, make sure to account for any additional years of interest you will be paying. For example, if you have 27 years left and you’re starting over with a 30-year refi, that’s three extra years of interest, and your break-even period is longer.

If you are ready to buy or refinance to take advantage of these historically low interest rates, call or drop us an email today. 

Article by: Steve Crisci–MDC Financial Group.

Is refinancing the right thing for you to do?  I can refer you to trusted lenders to analyze your situation. If you have questions, just send me an email or call 619-888-2117.

Lisa Ashkins, MA, CNE – Broker Associate, DRE#01764182 – Coldwell Banker West