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Thinking about refinancing your mortgage? Consider these things first.

Shawn Von Talge



01-15-2015

With rates being at lows not seen since May of 2013 many of you may be wondering if refinancing makes sense. The answer to this question depends on numerous variables and what you and your family are looking to achieve. For instance,

– Reducing your term from a 30 year to a 20 or perhaps even a 15 year mortgage
– Saving as much money monthly as you possibly can
– How long you plan on being in the home
– Your break-even or time to recover the expenses of the refinance
– If you need and/or want to pay off debt (i.e. credit cards)
– What type of loan you are in now (i.e. Conventional, FHA, VA, USDA or other)
– Your current equity position or loan-to-value (That is what your home is worth compared to what you owe and/or the payoff)

The answers and circumstances surrounding are unique for every homeowner out there and every single refinance is different, with different goals and motivations. There is a big misnomer among the general public that you must lower your rate by at least 1% for it to be considered. Well in some cases that is and isn’t true. The value of a 1% reduction for someone who is refinancing a balance of $75K is far different than someone that may be looking to refinance a balance of $375K. Meaning the higher your actual loan balance is the more susceptible you are to changes in rate (i.e. it may make sense to refinance w/ a .50% reduction in rate). The converse is true if you carry a lower balance. Meaning you may need a 1.0% or greater reduction in your current rate to justify refinancing. The point here is that every situation is different so consult a qualified mortgage professional to provide guidance.

Another key component of whether or not refinancing is the “right move” is something I call your “break-even analysis”. That is, how long does it take you to recover the costs incurred of refinancing? The rule of thumb is less than 24 months but depending on your anticipated tenure in the home that could influence factors a bit. For example, if the current balance on your existing loan is going up by $4k (due to refinancing costs) but you are saving $300 a month and getting to skip one month’s mortgage payment (which is typical of a refinance scenario) your breakeven could possibly be 13 months or less. So if you plan on staying in your residence at least another 3 years your total savings during that time frame is $6,900 (36 months – 13 recover months = 23 months left of true savings / $300 x 23 months = $6,900)

A few other factors play into this and there are other options available in determing what scenario is best (i.e. taking a slightly higher market rate and having your lender pay for some or all of the costs involved) but again every situation is unique and requires a different approach. There are lots of factors to consider as to whether or not refinancing is right for you and the above examples are just a few, which is why I recommend consulting a mortgage professional. Get the guidance you need have them provide you with some numbers and see if it makes sense. A good mortgage professional will ask and/or review the above factors with you and give you a recommendation, based on what you are trying to accomplish.

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