Mortgage Refinance: When to Do It?

A mortgage refinance is best considered when rates are low. A mortgage refinance provides a way for a borrower to lower their interest rate and therefore pay less on their monthly loan. This savings can be significant to a person’s budget. A refinance should also be considered for balloon mortgages or adjustable rate mortgages as well as a way to provide a more fixed payment schedule.

Loan Comparisons

The first thing a borrower should do is ask their lender for a loan comparison.  For example, if a borrower has a rate of 8 percent and they are interested in lowering their rate to t percent, ask the lender for a comparison to review the savings.  The payment on a $250,000 mortgage at 8 percent for a 30 year mortgage is $1,834.41. If the rate is reduced to 7 percent, the borrower could lower their payments to $1,663.26. The total reduction would be $171.15 per month. If the interest rate is reduced to 5 percent, the payments are reduced by $492.6 per month.

Lower rates may cost additional points.  A point is a percentage of the amount of borrower.  In the example above, a 7 percent rate may not cost anything.  The only fees that will be required will be the the closing costs. The savings is small, but there is a savings amount.  However, if the borrower chose the 5 percent rate and there was a two point cost, the cost would be added to the closing costs.

Adjustable Rate Mortgages

Loan refinancing makes sense for most borrowers when interest rates are lowered. For mortgage holders that took out adjustable-rate mortgages that have rates increasing, refinancing can be especially important. An adjustable rate mortgage, or ARM loan, is a loan that adjusts to reflect the changes in interest rates. In theory, ARMs rise and fall in response to changes in underlying market mortgage rates. At a certain point, a borrower with an ARM usually ends up paying higher rates than a comparable fixed rate loan.

Compare Refinancing Costs

Calculating the cost savings derived from a mortgage refinance will give a borrower a way to determine whether a loan refinancing makes sense. A mortgage broker or banker can help the borrower review the terms of any existing loan and perform these calculations.

There are fees associated with a refinance that should be heavily considered. For example, a monthly payment drop of $150.00 can cost $10,000.00 to accomplish. The cost of the refinance would then take five and half years to recoup the cost of the refinance. Costs are an important factor and should be compared with several years.

Timing a Loan Refinance

In a bad market, it is difficult to time when to refinance a mortgage loan. As quickly as interest rates on mortgage fall is as quickly as they may rise. If a borrower waits to long for rates to fall to a targeted interest rate, they may miss an opportunity to lower their payments and interest costs. It makes sense for a borrower to refinance any time a downward movement in interest rates occurs.