With the drop in interest rates many people are wondering if they should jump in and refinance their properties. There is a cost to refinancing and it is important to look at some numbers before refinancing to make sure you are better off with the new loan.
There are four things you need to consider when refinancing-
1. How much your payment will decrease
2. How much it will cost to refinance (closing costs, points, etc.)
3. How long you plan on keeping the property
4. Are you refinancing to lower your payment or get better financing terms?
I think an example will best illustrate the analysis.
Scenario –
Payment will decrease by $90 per month
Closing costs will total $1800
Analysis –
Divide the total closing costs by the monthly savings to determine how many months it will take to recoup your out-of-pocket costs (many of these costs can be rolled into the mortgage and don’t necessarily have to come out of your pocket)
$1800/$90 = 20 months.
If you plan on owning this property for more than 20 months than it would be financially beneficial to refinance.
Keep in mind it is not only a financial decision to refinance. It can be smart to refinance even if your payment increases slightly if you are converting short term financing to a long term fixed rate to hedge against increasing rates.
Posted by Carter Brown
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