Before a homeowner decides to commit to a mortgage refinancing offer, there are certain criteria to address. Generally, there is an economic motivation behind the decision, such as taking advantage of the current downward trend of interest rates, or switching to different types of mortgage loans, or perhaps getting access to the available cash tied up in home equity for financial reasons. Each motivation needs to be examined carefully, with not only short-term benefits evaluated, but long-term strategies kept in mind as well.
Refinancing Timetable – When is the best time?
There are two primary focus points to consider prior to moving forward with the refinancing procedure, even before the application process can take place. The first is checking interest rates offered at local lending institutions or online, bearing in mind that these rates will be offered to borrowers with the best credit ratings. The refinancing ‘rule of thumb’ is that current mortgage interest rates must be two or more percentage points below the rate applied to the existing mortgage, in order to be worth the refinancing effort.
The second issue is determining just how long a borrower plans to stay in the home after the refinancing takes place. This formula can be examined by taking the estimated cost of closing at $4,000, and dividing it by an estimated savings in monthly payments, say $100. In this case, it would take approximately 40 months, or 3.3 years, before breaking even with the initial costs of mortgage refinancing.
Budgetary Effect – What are the potential savings?
If lowering the monthly payment is the primary consideration, then refinancing with a lower interest rate is the obvious choice. If the current monthly mortgage payment on a $200,000 loan at 8% interest over 30 years is $1,468, the same loan at 6% would bring the monthly payment down to $1,199. Over ten years, the savings would be $32,280 added back into the household budget.