Thursday, November 12, 2009

Chasing the Refi . . .

So you keep hearing that interest rates are low. You're probably asking yourself if it's time to refinance. Well, that depends. Here are a few things to consider:

  • Are you currently paying mortgage insurance and will that go away because you have enough equity in your house? If you are able to get rid of the mortgage insurance premium you could actually take that extra payment and put it towards your principal, paying your mortgage down quicker.

  • Your payment right now is so high it's painful to make the payment and refinancing would make the payment more manageable.

  • Do you have equity in your house? If not, you may be faced with having to refinance into a a FHA loan and that means you will have mortgage insurance.

  • Your payment may go down but you may be paying longer. For example, you are 5 years into your 30 year mortgage, you refinance and now the clock starts over because you refinance into a new 30 year mortgage. One way to combat that is to get a 25 year, or even 20 year mortgage.

  • What is the cost to refinance? For example, if it costs you $8,000 to refinance and it will lower your payment by $150 a month- how long will it take you for you to recoup the savings? Take $8000 and divide by $150 that would mean it would take you 53 months or 4.5 years to recover that $8000. So unless you're planning on staying in your house for at least 5 or more years you might want to reconsider whether it's worth refinancing. One way to combat the cost is to take your current money being held by your lender for your insurance and taxes (called escrow) and your payment you get to miss the month after you refinance and put that towards your refinance costs. That could cut the costs of the refinance in half, thereby giving you a short time line to recoup the costs of refinancing.

Remember this is all very general, there are a lot variables and more things to consider that aren't discussed. So before you decide to chase the refi craze, run the numbers and make sure they work. You may just decide you're better off right now without refinancing.
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