How do I know if I should refinance my mortgage?

By Steven Merkel AAA
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

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