A:

The typical rule of thumb is that if you can reduce your current interest rate by 0.75-1% or higher then it might make sense to consider a refinancing move. First step is to calculate your monthly savings should you do the refinance, for example:

Suppose you have a 30-year fixed rate mortgage loan for $200,000. Currently, you have a 6.5% interest rate (fixed), and your beginning of month payment is $1,257. Now, rates are at 5.5% interest (fixed), this could reduce your monthly payment down to $1,130.

This would be a monthly savings of $127, or $1,524 annually.

Next, you'll need to ask your new lender to calculate your total closing costs for the refinance if you were to proceed. If your costs come to approximately $2,300, you know that your break even point would be 1.5 years in the home. ($2,300 divided by $1,524 = 1.5 years)

If you plan on staying in the home for two years or longer, refinancing makes sense. Keep in mind that, during periods of home value decline, many homes get appraised for much less than they were historically. This may cause you to not have enough equity in your home to satisfy the 20% down, and may require you to put down a larger deposit than expected or you may have to carry primary mortgage insurance (PMI) which will ultimately increase your monthly payment anyways. (For related reading, check out 6 Questions To Ask Before You Refinance and Mortgages: The ABCs Of Refinancing.)

This question was answered by Steven Merkel

RELATED FAQS

  1. Can small investors buy collateralized mortgage obligations (CMOs)?

    Read about collateralized mortgage obligations and their relationship with small investors, plus what risks small investors ...
  2. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Learn about the difference between the Z-spread and option-adjusted spread valuations of future cash flows for bonds, and ...
  3. What are some historical examples of debt securitization?

    Find out how debt securitization started, how it works and why the government facilitated the mortgage-backed security market ...
  4. What price-to-book ratio is considered average in the chemicals sector?

    Learn more about the loan-to-value ratio, what the ratio measures and how to calculate the loan-to-value ratio on Microsoft ...
RELATED TERMS
  1. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  2. Forbearance

    A temporary postponement of mortgage payments.
  3. Accessory Dwelling Unit (ADU)

    A legal and regulatory term for a secondary house or apartment ...
  4. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes ...
  5. USDA Non-Streamlined Refinancing

    A mortgage-refinancing option offered by the United States Department ...
  6. No-Appraisal Mortgage

    A type of home loan used for refinancing for which the lender ...

You May Also Like

Related Articles
  1. Stock Analysis

    Can American Capital Agency Maintain ...

  2. Stock Analysis

    How Two Harbors' Derivatives Work?

  3. Stock Analysis

    How Chimera Investment Bear The Brunt ...

  4. Stock Analysis

    How Are Interest Rates Affecting Annaly ...

  5. Investing

    Ready To Invest In Financial Leverage ...

Trading Center