With home rates at historical lows I am often asked, “Should I refinance right now?”
The answer depends on a number of factors—more than just the rate of the new loan.  So I’ve asked mortgage expert John Cole, Senior Loan Executive with First Financial Mortgage in Louisville, Kentucky to guide us through the variables associated with a re-fi.
With rates changing daily, experts don’t recommend trying to time the market to lock in the absolute lowest rate.  Instead, your decision should be based around a number of factors. 

 

One is recapture—that is, how long will it take to regain in savings the amount you spent on closing costs? 

 

For example, if closing costs are $2,500 and you save an additional $50 per month on your mortgage, it will take you 50 months to reach your “break even point.”

 

However, if you plan to stay in your home for many years, a reduction of just a few points in your interest rate could end up saving you thousands of dollars over the life of the loan. 

 

Ask your loan officer to calculate this for you. They should be offer you a comparison of your current verse proposed loan schedules.  Ask, “How much will I save per month by refinancing?  How much will I save over the life of the loan?”

 

Other questions Cole recommends asking include, “Can I afford to make extra payments toward my mortgage?” If so, it may be beneficial to make extra principal payments to reduce the balance of the loan.

 

Also, “Will refinancing reduce risk by paying off risky products (such as adjustable mortgages, or equity lines which are adjusting), or eliminate PMI (private mortgage insurance)?  Does refinancing accomplish my goals of monthly savings, lifetime interest savings, or home improvement?” 

 

“All of these things should be discussed with your lender,” Cole says. “Anyone can quote you a rate. They need to have these personal discussions to see if a re-fi is right for you.”