When is the Right Time to Refinance?

When is the Right Time to Refinance- 150x150For most homeowners faced with the constant ups and downs of the housing and credit markets, knowing exactly when to consider refinancing existing mortgages can seem much like a roll of the dice. Crunching a few numbers into online mortgage calculators is a good way to get a sense of where things stand on a preliminary basis, but examination of the long-term effects need to be evaluated. Factoring each of the motivations behind the decision involves weighing both sides of the equation – the potential savings and the realistic expenses – to determine the feasibility of the refinancing plan.

Closing Costs Vs. Monthly Savings

Common sense dictates current interest rates are the primary factor behind most refinancing decisions. Usually, when the prevailing rate drops by at least one percent, most mortgage advice will steer homeowners towards refinancing as it is worth the effort. The bottom line is best evaluated in regards to what effect the refinancing formula has on the monthly payment when compared to the associated mortgage closing costs. By performing a simple comparison, and using an average closing cost of around $3,000 for a typical home loan, assume the monthly repayment figure to be in the neighborhood of $1,800. Refinancing may reduce this number by approximately $200 each month, which appears to be acceptable, especially when applied to budget savings.

Up-Front Cost Vs. Long-Term Gain

However, the real benefit can only be factored in by determining the length of time the homeowner plans on staying in the residence. If the refinancing option has any value, it is advisable to take the numbers one step further. Use the $3,000 closing cost, and divide it by the projected monthly mortgage savings estimate of $200. The answer yields a 15 month duration before the effect of refinancing produces a positive influence on the result. If the homeowner relocates before the 15 months is up, there is no monetary benefit to the refinancing decision. Only if the homeowner stays in the residence beyond this ‘cut-off’ date will refinancing options begin to make any economic sense.

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