Are you considering refinancing your home loan but are sitting on the fence with the question Should I Refinance My Mortgage? There’s a lot of bad advice online when it comes to mortgage refinancing; however, answering this question for your self is easier thank you think. Here are several tips to help you answer the question “Should I Refinance My Mortgage” without paying for hidden markup and junk fees.
Should I Refinance My Mortgage This Year?
Many financial advisors will answer your question Should I Refinance My Mortgage with the two percent rule of mortgage refinancing. The two percent rule states that you should never consider mortgage refinancing unless the new interest rate is exactly two percent lower than your old interest rate. This is boneheaded advice on a number of different levels that I’ll show you in a moment.
Instead of relying on the two percent rule to decide if a new home loan is right for you it makes more sense to evaluate your options on a cost per savings basis. Consider first that it’s going to cost you money at closing to refinance your home loan. The largest of these is the loan origination fee paid to the person arranging your mortgage refinancing. Ideally you’ll pay one percent of your loan amount for loan origination to a broker that doesn’t accept lender paid compensation for marking up you interest rate; however, that’s a topic for another discussion.
Cost vs. Savings Mortgage Refinancing
Suppose for instance you are refinancing your home loan for $250,000. The existing interest rate is 6.75% and you’re currently paying $1,620 a month. The broker quotes you and interest rate of 6.0% with a loan origination fee of 1.5% which means you’ll be out of pocket for $3,750 at closing. According to the previously discussed two percent rule most financial advisors that subscribe to this “wives tale” will tell you not to refinance.
What happens if we throw caution to the wind and decide to go through with a new home loan? After paying your broker the $3,750 for arranging the new home loan your new payment will be $1,498. Don’t break out the champagne yet; you still have to recoup the $3,750 you paid the broker before you realize any savings from a new home loan. You can easily calculate how long this will take by dividing your closing costs by the difference in your new payment amount. In this example take the difference of your new payment amount $1,620 – $1,498= $122 per month and divide your closing costs by this amount. ($3,750 / 122 = 30 months)
Is a New Home Loan Right For You?
In this example it will take 30 months, which is two and a half years, to recoup the broker’s fee before you realize any savings from mortgage refinancing. Consider that it can take 30 years (or longer) to pay off the average fixed rate home loan and two years sounds like a mere drop in the bucket. If the amount of time it takes to recoup your expenses from refinancing with the lower payment amount is acceptable for you then mortgage refinancing is probably a good idea for your situation.
You can learn more about getting your next home with wholesale rates by checking out my free Underground Mortgage Refinancing Videos.
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