If you are standing on the sidelines waiting to refinance, don’t wait too much longer. Rates are at historic lows. “This is an excellent time to refinance,” said Greg McBride, senior financial analyst at Bankrate.com, in a February 2012 Wall Street Journal interview. If you can’t decide if a refi is right for you, here’s some factors to keep in mind.
Consider a refi if you have an adjustable rate mortgage, and plan on staying in your house for the long haul. Refinancing can lock in a fixed rate and take the risk of rising payments out of the equation.
You’re in luck if you have excess cash flow and want to pay off your mortgage sooner. You can refinance from a 30-year mortgage to a shorter 10-, 15-, or 20-year mortgage and save tens of thousands in interest. This is an especially good deal if your payment doesn’t increase much with the new, shorter loan. One cautionary note: don’t get too ambitious with this strategy and take on bigger payments unless your income is rock solid. You are often better off keeping a longer-term mortgage with a lower monthly payment to preserve some budgetary wiggle-room. You can always send in extra principal payments each month to pay down your mortgage faster.
Moving in a few years? Refinancing is probably not worth it. Closing costs run on average about 2% of the mortgage amount, and you may not have time to recoup them. Calculate your break-even point (closing costs divided by potential monthly savings). That tells how long it will take you to start saving money on your refi. Ideally, your break-even point will be less than two years. For example, when I refinanced my mortgage in 2010, my break-even point was 12 months, making the refi pay off in just a year. (Need help with calculating break-even points or hypothetical monthly payments? Visit Bankrate.com and try out the many free mortgage calculators).
Ask if your current lender will modify your loan, lowering the interest rate with little or no closing costs. You might not get the lender’s best rate, but it should still save you money, and makes most sense if you don’t plan on being in the house that long.
Probable deal breakers? Your house is underwater, meaning your house is worth less than your outstanding mortgage (about 1/2 of all homes in Florida are underwater, at least figuratively!). Banks prefer to refinance if your mortgage is no more than 80% or 90% of your home’s value. There are special loan programs available for underwater borrowers, but in reality, we’ve seen only one underwater refi approved for our clients. Another deal breaker? Iffy credit scores. In the first half of 2011, about half of all mortgages went to borrowers with credit scores above 750. If your credit isn’t stellar, or your house doesn’t appraise out high enough, you won’t be offered the best rates, making a refi less attractive.
While mortgages are much more difficult to obtain than they were a few years ago (yes, lenders are very picky) we have seen numerous clients succeed in cutting their monthly mortgage payments by refinancing. Consider this as possibly your last chance to borrow at incredibly low rates, get an additional tax deduction on top of that, and buy or refinance assets at their lowest valuations in years. What’s not to like?