When interest rates drop, one wonders whether or not it makes any since to refinance. Unfortunately, there are many different“ rules of thumb” being thrown out to the public to answer the question, “When is the right time to refinance?”
One of these “rules of thumb” says that if your current mortgage loan is less than two years old, you should not refinance. Generally, this thought comes from the fact that closing costs were just paid and when the refinance occurs there will be another set of closing costs. Another common “rule” used to determine the feasibility of refinancing is that there should be at least a two percent spread between the old interest rate and the new refinance rate. The reasoning behind this rule is that at least a 2% difference in interest rates is usually needed in order to justify the expenses incurred when refinancing.
In reality, refinancing your home mortgage could be done any time there is a significant savings in your monthly mortgage payment (or in your overall debt payments if you are consolidating other loans by refinancing) AND you plan to live in your home long enough to recover the expenses incurred with refinancing.
REFINANCE OR NOT FORMULA
1. Your current monthly mortgage payment
2. Your new monthly mortgage payment based on the rate being offered
3. Subtract line 2 from line 1
4. Estimate your closing costs(typically 2-3% of the new loan)
5. Divide the amount on line 4 by line 3. The result is the # of
months it will take you to recoup your closing costs
6. How many months do you plan to live in your home?
7. If the number on line 6 is at least 12 months > line 5, call your current lender to see what they will
do. Comparison shop by calling a couple of other lenders.
RE/MAX of Boulder, Inc