Is Refinancing Your Mortgage Right For You?

by Hank

Mortgage rates are at the lowest level they have been in a lifetime. The current rate for a thirty year fixed is 4.56% (as of August 9th, 2010) according to Bankrate.com. Now may be the perfect time to consider refinancing your home mortgage. With the new lower interest rates, refinancing your mortgage may save you several hundred dollars per month in mortgage payment, but there are several things to consider when deciding if a refinance right for you.

Is refinancing your mortgage the right decision for you?

Cost Benefit Analysis Of Refinancing

You have to pay for closing costs again to refinance your mortgage. So, you have to ensure that you will be in your current home long enough to make the savings equate to more than the closing costs. Just like when you bought your house the first time, there are the same types of closing costs and fees associated with refinancing your mortgage. You can expect to pay attorney’s fees, title search, home inspection costs, one to three points, and an origination fee. Costs may vary significantly from one area to the next and from different lenders. The amounts listed here are estimates only, and your actual closing costs may be higher or lower than what is listed above. You have to conduct your own cost benefit calculations on if it is worth it to you to refinance.

An Example Of The Savings From Refinancing

A $150,000 mortgage on a 30 year fixed rate with an interest rate of 5.325% will have a monthly payment of approximately $835 excluding insurance, taxes, and any PMI associated with the loan. Getting a lower rate such as the current 4.56% can save you $70 per payment or $840 per year. If you paid 1% in fees to refinance, you would only need to remain in your home for two years in order to pay back those fees in cost savings. Any amount of time you spend over those two years will be savings that go straight into your pocket.

You Need 20% Equity

You will need to have at least 20% worth of equity in your house to avoid private mortgage insurance (PMI). Avoiding PMI can drop your mortgage payment by another $100 or more per month right off the bat. If you are refinancing your mortgage without 20% in equity, you may negate the whole intention of refinancing to lower your monthly mortgage payment. You may not even qualify for a refinanced mortgage without 20% in equity.

Prepayment Penalty?

Does your original loan have a prepayment penalty? Most borrowers do not have this feature, but some old loans still have this clause. The mortgage documents for your existing loan will state if there is a penalty for prepaying the loan. If the penalty is high enough, then it might be a big deterrent to paying off your loan early. While these clauses were popular in the past, home owners should steer away from this as a general rule.

Don’t Think About Cash Out

Cash out refinances were all the rage when the housing market was booming. Now that it is still struggling to recover several years later, a “cash out” refinance is not a viable option for almost everyone. Instead, borrowers need to think about refinancing their loans in order to obtain a lower monthly payment.

Now is the perfect time to consider refinancing your mortgage since rates are the lowest we have seen in decades. But, consider the costs and the additional factors to ensure that refinancing is the best option for you.

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