Should I Refinance Now or Wait?

Should I Refinance Now or Wait?


Homeowners who haven’t refinanced over the past several years may believe they missed out on a good thing. Certainly, if you refinanced before the market crash of 2008, there is a good chance you got a hold of a fixed rate mortgage for about 4 percent. Adjustable rate mortgages came in as much as a point under, allowing some people to enjoy a once in a lifetime financing opportunity.

Mortgage rates have climbed since then, but they’re still not far off of the low rates we saw a few years back. As of this publication, the average interest rate on a 30-year fixed rate mortgage is 4.59 percent and just 3.14 percent on a 5/1 ARM. Of course, you must have top credit to qualify for these rates with a credit score of 740 or higher in some cases. Expect to pay a higher rate with a lower credit score with some difficulty refinancing if your score is below 700.

Refinance Now?

Should you refinance now or wait? If your credit is good, then consider this option. If your credit score is low, you my want on rebuilding your credit. Obtain your three credit reports from TransUnion, Experian and Equifax, to review what problems are holding your score down. Build up your score before revisiting this issue.

Let’s look at an example of a homeowner who has a 30-year fixed rate mortgage and is paying 6.35 percent on a $250,000 home loan. She took out her loan in July 2002 when interest rates were falling and has kept up with her payments. Her current payment is a manageable $1,580.17, but she wants to do two things: refinance to a 15-year fixed rate mortgage and keep her payments about the same. Under this revised schedule, Jane Homeowner will pay off her mortgage one or two years before she retires and hopes to use the proceeds to pay for her eventual move to an adult community with assisted living.

Jane’s mortgage balance is down to $217,000, an amount she wants to finance for 15 years. After further consideration she decides to borrow $225,000, using the $8,000 extra to pay for a new roof. She fields quotes from five lenders and decides to go with the one offering an interest rate of 3.375 percent (3.521 percent), which means she’ll pay $1,594 per month or about $14 more than what she had been paying. Under this arrangement, however, she shaves six years off of her mortgage and has money left over to handle some home improvement projects.

Closing Costs

There is one thing Jane has not factored in at this point and it is closing costs. She managed to snag a low rate, but her closing costs will total about $4,000 which she’ll have to pay out of pocket or take out of the $8,000 in home renovations she wants to do. Suddenly, her particular arrangement isn’t quite the deal she had hope, but she can resolve the problem by adding the $4,000 closing costs to her loan. Jane’s payments are now $1,623 per month, an increase of $43 per month.

For some people, $43 more per month may be manageable, but for others it could pose a hardship. Jane’s primary goal is to have her house paid off ahead of her retirement, but that is something she can do without refinancing by paying a bit extra each month on her loan. If Jane takes that $43 per month and begins applying it to her mortgage now, then she can pay off her loan in May 2031 instead of June 2032. Under this arrangement she shaves 11 months off her loan, but that is far less than the 6 years or 72 months she had hoped to knock off.

Homeowner’s Choices

If Jane decides to pay an extra $300 per month on her mortgage, she will be able to retire her loan at the same time when she wants to retire. But, that also means she’ll be paying $1,880.17 per month for the next 21 years which is $257 above the $1,623 she’d be paying by refinancing for 15 years and folding in her closing costs.

Long story made short: If you’re considering refinancing, be prepared to work with a calculator and determine your closing costs. Home refinancing should not be rushed and your needs, short and long term, must be weighed carefully.

Resources Loan-to-Value Calculation (LTV)

BNET; Should Your Refinance Your Mortgage? Maybe Not; Alan Roth; June 30, 2009




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Categories: Home Financing

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Auto Trends Magazine", an online publication. Matt covers campus, consumer, business and financial topics on various websites and weblogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".