When to Refinance

In order to make a wise financial decision and prior to making a formal loan application for refinancing your home there are several important questions that you need to ask yourself. By taking an honest assessment of your situation and keeping your financial goals in mind, refinancing may very well be a sound decision.

  • How long do I intend to live in the home?
  • How much can I save verses my current interest rate?
  • If your current mortgage is an adjustable rate mortgage (ARM), what are the adjustment intervals and how much can the rate fluctuate per adjustment?
  • Does converting to a shorter term mortgage make sense?

Let’s examine each question to help determine its importance to your situation. If you are going to live in your current home for several years and can amortize the closing costs for the new mortgage over that period of time, refinancing may make sense.  There are typical closing costs that are associated with every loan. In some situations these closing costs may be paid by your mortgage broker. Generally a mortgage with this scenario comes with a higher interest rate.
 
Refinancing to lower your interest rate is a good idea in most circumstances. The general rule of thumb is that if you can save a minimum one half of one percentage point and will be living in the home for at least two years, refinancing may make sense. Keep in mind that you have to recoup the cost of closing the loan before you realize any savings.

Over the past five years or so, adjustable rate mortgages (ARM’s) have been very popular. These loans have fixed rates for the first 3, 5, 7 or even 10 years. After the initial fixed rate period, which typically was at a lower rate, the interest rate would then adjust at predetermined periods and in predetermined increments. Most of these loans adjust annually on the anniversary date of the loan and can move up or down as much as two percent (2%). We hardly ever see them adjust down. In most cases these loans have a cap, or top limit, on how high the rate can go over the life of the loan. If you currently have an ARM and your fixed rate term is over it would be a good idea to meet with a qualified mortgage professional to discuss your situation and survey your options.

Converting to a shorter term mortgage almost always is a good choice. Generally a shorter term mortgage carries a lower interest rate and you save in the amount of interest that you pay over the life of the loan. I do want to throw out another idea for you if you are considering refinancing to a shorter term. If your interest rate is competitive with current rates, think about not refinancing and just make additional payments to the principal each month. This will accomplish a similar result of paying off your mortgage in a shorter timeframe.
 
A WORD OF CAUTION – In today’s mortgage world there are many teaser rates being advertised. I have seen rates advertised as low as 1.25%. Beware of these loans as they are negative amortization loans. What this means is that your payment will not pay all of the interest that is due on the loan for that month. The unpaid interest for that period is then added back to the principal balance thereby increasing the amount that you owe on the loan. Some mortgage companies refer to these loans as Flex Loans. They are offered with the option of paying a full amortized payment, an interest only payment or a partial payment. Of course the partial payment teaser rate is the one being advertised. Here is an example:

A 30 year $200,000.00 mortgage at 6.25% would have a payment of $1231.43 per month for principal and interest
A 30 year $200,000.00 mortgage at 6.25% would have a payment of $1041.67 per month for interest only
A 30 year $200,000.00 mortgage at the 1.25 % teaser rate would have a payment of 208.33 for the month leaving a shortage of $839.34 which would be added back to the original principal of $200,000.00 and yielding a new principal balance of $200,839.34. This new principal balance is the figure that the next months payment would be calculated from.
 
I hope you have found this information on refinancing your home to be helpful. Should you determine that you would like to discuss your options for refinancing your home I will be glad to assist you as I am a loan officer and a REALTOR in Georgia. Feel free to contact me at any time.