If you’re contemplating refinancing but aren’t sure if a new home loan is right for you, there are several things you’ll want to consider before taking out a new mortgage. There are a number of old wives’ tales and loads of misinformation on the internet that can get in the way of making informed financial decisions. Here are several of my best mortgage tips to help you answer the question “Should I Refinance My Mortgage” without falling victim to the sea of misinformation online.
Should I Refinance My Mortgage Loan?
There’s an old wives’ tale told to this day by a number of “financial advisors” that states you should never refinance your home loan unless your new mortgage rate is at least two percent lower than your old mortgage rate. This is horrible mortgage advice. Instead of buying into the two percent rule of mortgage refinancing it makes more sense to base your decision on a cost and savings rather than this urban legend of financial advice. This is of course if lowering your payment is your goal when refinancing your home.
Let me explain…we all know that you loan amount and mortgage rate determine your monthly payment amount. This is done with a repayment process known as amortization. What it all boils down to is the lower your mortgage rate, the lower your monthly payments will be; however, there are refinancing costs you’ll need to consider also. I am of course referring to origination fees and closing costs. When answering the question Should I Refinance My Mortgage for you, it makes good financial sense to weigh the savings from your new, lower monthly payment against the cost of taking out the new home loan. If you can live with the amount of time it will take to recoup your origination fee and closing costs than mortgage refinancing makes good sense for you.
Here’s an example to illustrate how this works. Suppose your current mortgage rate is 6.5% on a 30 year, $250,000 fixed rate home loan. Your monthly payment on this home loan is $1,580 per month. Suppose you qualify for a 5.5% mortgage rate and your closing costs will be $6,500. Your new monthly payment with the lower 5.5% mortgage rate will be $1,418, which is a savings of $162 per month. Since you’re paying $6,500 in fees to save $162 per month it will take you 40 months, just over three years to recoup this expense before you realize any savings from your new mortgage. If you can live with three years then the answer to the question Should I Refinance My Mortgage is yes.
There are of course other reasons for refinancing that don’t result in a lower monthly payment. Many homeowners used risky adjustable rate loans to purchase their homes and are facing balloon payments or skyrocketing interest payments when their teaser rates expire. Refinancing these risky home loans with a fixed 30 year home loan is nearly always going to be the right choice. Another common reason for refinancing is to borrow cash against your home equity which could also result in a higher monthly payment.
How to Save Money When Refinancing
Once you’ve answered the question Should I Refinance My Mortgage the question becomes how can I do this without getting ripped off? There are a number of unnecessary junk fees and markup of your mortgage rate for a double commission that you’ll want to avoid to make sure you get the most for your refinancing dollar.
You can learn more about answering the question Should I Refinance My Mortgage for yourself while avoiding unnecessary junk fees or markup by checking out my free Underground Mortgage Refinancing Videos.
Here’s a sample of what you’ll get…this video explains why 95% of your neighbors pay too much for their home loans.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
