Does Refinancing Your Loan
Does Refinancing Your Loan Make Sense?
By and large, Americans are a refinance-happy people. The average length of time a mortgage survives before being refinanced is about 7 years. Since the average mortgage carries a 30-year term, that number may seem a bit low; however, in light of the broad array of situations where refinancing might make financial sense, it doesn’t seem so bad.
Should You Refinance?
On the surface, refinancing a loan makes sense anytime interest rates fall. If you owe 7% on a mortgage and prevailing interest rates have fallen to 6%, you’d have to be insane not to refinance, right? Well, not necessarily because in the real world, closing costs are a serious issue. If refinancing saves you $ 75 per month in mortgage interest but you have to pay $ 2500 in closing costs, the answer to the “should I refinance” question depends entirely on how long you plan to remain in your property.
Obviously, in the example above it doesn’t make financial sense to refinance the loan if you plan to sell the house within a few months.
Specifically, it will take $ 2500 closing costs / $ 75 per month interest savings = approximately 34 months for the interest cost savings to justify paying the closing costs. That is, if you plan on selling the house in less than 34 months (just under 3 years), it doesn’t make sense to refinance. The length of this payback period is often longer than most people realize.
Do The Math
The only way to know for sure whether refinancing is the best course of action is to calculate your anticipated payback period yourself. Don’t forget to take the value of your time into account, though. Is saving $ 500 over 5 years worth the hassle of contacting a broker, signing the papers, going to closing, etc? For many people (including me), it’s not. All of this isn’t to say you shouldn’t refinance, just that you should be realistic about the magnitude of money you’ll save by doing so.
Visit amateurassetallocator.com for hundreds of articles on personal finance and credit topics, such as student loan refinance tips and information on just what is a high yield money market fund.
David demystifies the process of refinancing your home loan. Lean how to calculate the break even point of refinancing your mortgage. Find out what questions you should ask a responsible lender before you refinance in addition to other useful tips about refinancing your mortgage. Remember, homeownership is still the single most important investment you can make in your lifetime. Look for other webisodes in this series by searching for “Smart Homeowners” or visit finishrich.com
Video Rating: 5 / 5
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