Is it Time to Refinance?

Assuming that your goal is to reduce your interest expense, you’ll know it’s time to refinance if a.) there are rates available lower than your current rate, and b) if the cost to refinance can be recouped through your reduced mortgage payment before you plan to sell.  Here are the steps:

• Gather the info on your current mortgage:  principal balance, interest rate, payment and current market value (use recent comparable sales as a guide).
• Go to a mortgage rate consolidator website – I like www.mortgagemarvel.com or www.bankrate.com - and enter your data.  Be sure to select “refinance” instead of “new purchase” – the results will likely be different.
• Consider a 30-year fixed rate even if you plan to pay off the mortgage sooner.  The lower required payment might come in handy if you lose your job or have some other financial crisis.
• Sort the results by annual percentage rate (APR) from low to high (APR takes into consideration your loan discount points and closing fees) and confirm that there are offers with interest rates lower than your current rate.
• Look at the provider with the lowest APR and note the closing fees…let’s say the closing fees are $2,500. 
• Next, note the payment for this provider…let’s say it’s $1,200/month (this is excluding any escrow). 
• Now do some math - if your current monthly payment excluding escrow is $1,700, it will take you five months to break even on this deal ($2,500 closing costs divided by $500 monthly savings).
• If you plan to live in the house longer than the payback period, you should consider refinancing.

A few things to keep in mind: 

• Don’t be tempted to refinance just to lower your payment – what you are really after is reducing your interest payments over the life of the loan (or you want to get out of an adjustable rate mortgage).  Only refinance if you are lowering your borrowing costs through a lower or a fixed interest rate, not just “resetting” your loan term.
• It’s possible that you may not qualify for a better rate if your mortgage amount is higher than the market value of your home.  If you are in this boat and you are not behind on your payments, you may be eligible to refinance through the Making Home Affordable Program (HARP).  You can learn more about HARP at http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx .
• If you are behind on your mortgage payments, you may qualify for loan modification under the Home Affordable Modification Program (HAMP).  You can learn more about HAMP at http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/hamp.aspx.