Refinance at the Right Time
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by: marciafreeman
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How do you know when the time is right to refinance your house? Knowing when to make your move may seem more like an art than a science, but it is pure math. Walk through the steps, and at the end you will know whether or not now is the time for you to refinance.
First, what interest rate is your lender likely to offer you? The better your credit rating and the lower federal interest rates are, the lower your potential interest rate will be. Although you cannot know your exact interest rate until the lending bank evaluates you and makes an offer, online sources can give you an excellent idea of the range in which your interest rate will fall.
When you have a general idea of what your interest rate will be, decide how long a mortgage term you prefer, then use an online loan calculator to calculate what your monthly payments will be when you refinance. (The best length is equal to or less than the remaining term of your current mortgage. Otherwise, a longer term will let interest compound longer, adding extra money to the total and potentially offsetting the savings you would have seen from a refinance.) Also work out the likely difference between your monthly payments after you refinance and the amount you currently pay per month.
Then calculate how much a refinance will cost you in extra fees and taxes. Beware these "hidden" costs: An average refinance frequently costs $2000 to $3000, and sometimes costs even more.
When you know the exact total for your refinance, divide it by the difference between what your currently pay per month and what you will pay per month after refinancing. The result is the number of months it will take you to break even after the refinance. For example, if you pay $1200 right now, you would pay $1000 per month after the refinance, and refinancing would cost $2200 in taxes and fees, it will take you 11 months to break even. After that, you would start saving money. Ask yourself whether you are going to stay in your home long enough to see noticeable savings from a new mortgage. If the answer is no, then you would be better off staying with your old mortgage. However, if the answer is yes, then now is the time to refinance.
As you can see, knowing when to refinance is simply a question of math. There is always a little wiggle room in the variables, but you should be able to come up with an answer that is close to what a loan officer would give you. Apply these steps to choose when to refinance, and you and your family will enjoy greater financial security for years to come.
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Learn the real scoop on home mortgage, visit www.getsmart.com/refinance.
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