Since loan rates are now dropping, for some refinances or refis are popular ideas again. In short, you can refi your mortgage or mortgages to get only one mortgage, for instance, to eliminate PMI, to get out of an ugly option ARM or any of a host of other reasons. Right now, banks are offering great deals on refis.
Should you refi?
This is a good question, especially for those whose mortgage is only a year to a few years old or whose interest rate isn’t that bad. How do you know when it’s a good idea to refi?
Essentially, you will be looking for the break-even point. Calculate your break-even point to figure out if it’s worth it to you in your present position and with your present plans. It sounds hard, but it’s easy. Here’s how you do it.
The break-even point is the time it takes to make up in monthly savings what you paid in fees. You calculate it by dividing the mortgage fees by the monthly savings. For example, let’s say you would save $100 a month by refinancing, and the closing costs would be $3,000. Your break-even point is 30 months from now:the $3,000 in fees divided by the $100 a month in savings.
Are you planning to stay in your house for more than 3 years–let’s say 5 years. Then, it might be worth it. Of course, you don’t need to have cash to refi, the closing costs will be added to your loan balance. Some banks even do the refis for no closing costs, usually with slightly higher rates. As for everything else, you need to shop around.
You can figure your monthly savings by checking with a loan officer and requesting an estimate of the new loan you could get and comparing that figure to the amount you are paying now for principal and interest. If you have an impound account, you do need to separate out the taxes and insurance amount which will not change.
Should you change the loan term?
When interest rates are low, as today, many people opt for an acceleerated payoff plan by refinancing a 30-year mortgage into a 15-year mortgage. The interest rate will probably be at least half a percent lower, but the payment will be considerably higher. On a $300,000 loan, for instance, payment on a 30-year loan at 5.75% would be $1750 per month. On a 15-year mortgage at 5.25% the payment would be $2411.
In the long run, you will save thousands in interest payments by choosing 15 over 30 years. In the short run, though, you must be sure that you will have the money necessary to make the increased payment. In case you are insecure in your income, another option is to make 13 payments a year on the 30-year loan instead of 12. This will shave about 7 years off your 30-year term and save you a bundle.
Can you refi when you’re upside down?
Plenty of homeowners would like to refi into the new lower rates, but run into a gigantic stumbling block: their homes value has fallen dramatically in the past year. Homeowners tend to mentally inflate the value of their own homes, thinking of all the upgrades they’ve added and the money they’ve spent in maintenance. Real estate values, though, are implacable. Your home almost assuredly is not worth more than your neighbor’s home which just sold at less than what you paid for yours.
In fact, before even considering a refi, if you suspect you may have no equity, consult a real estate agent and ask him or her to “run the comps” and give you a ball-park idea of your homes value. If you have less than 10% equity, asking for a refi could trigger PMI. So, check first.