If you’re struggling to answer the question should I refinance, there are several things you’ll want to know before answering this question. You might have heard of the two percent which states you should never refinance unless the best refinance rates are at least two percent lower than what you’re already paying. This is generally considered to be bad advice despite being popular with many financial advisors. Here are several tips before you refi to help you answer the question Should I Refinance for yourself.
Should I Refinance My Home Mortgage Loan?
The internet is an excellent resource for mortgage refinancing; however, when it comes to answering the question Should I Refinance there is a lot of really bad advice out there. Instead of relying on a blanket two percent to base your decision to refinance it makes more sense to test your options on a cost per savings basis. You can do this by figuring out how much mortgage refinancing will cost you and divide this figure by the amount you’re saving each month.
Here’s an example to illustrate how this works. Suppose you’re refinancing your home for $250,000. Your broker quotes you the best refinance rates at 4.5% which is a full point lower than what you had paid at 5.5%. You’re a savvy homeowner so you’re thinking Should I Refinance? According to the two percent rule, you should not; however, you’re smarter than that so let’s look at the numbers.
At 5.5% your monthly payment on a $250,000 30-year, fixed rate mortgage is $1,419. It’s going to cost you about $6,000 for the loan origination fee and closing costs to get you a new payment amount of $1,266 at 4.5 percent. Should I Refinance? Is it worth it paying $6,000 to save $153 a month? It will take you 40 months to recoup your expenses and break even before realizing any benefit from your mortgage refi. That’s just over three years. The average homeowner refinances once every four years so whether you should in this case really depends on you.
Beware Lender & Broker Junk Fees
You can speed up the process of recouping your expenses by avoiding unnecessary fees, especially from your loan originator (broker). One of the telltale signs that you’re dealing with a shady mortgage broker is the rate lock fee. Any broker that quotes you a fee for locking your mortgage refinance rate is just plain dishonest. Other junk fees include application fees, processing fees, and courier fees. One of the most common mortgage mistakes is neglecting to negotiate fees and closing costs when refinancing. You can latterly save hundreds, if not thousands of dollars with good old-fashioned haggling.
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