Is Refinancing Worth It?
Refinancing can be worthwhile, but it does not
make good financial sense
for everyone. A general role of thumb is that
refinancing becomes worth
your while if the current interest rate on your
mortgage is at least 2
percentage points higher than the prevailing market
rate. This figure is
generally accepted as the safe margin when balancing
the costs of
refinancing a mortgage against the savings.
There are other considerations, too, such as
how long you plan to stay
in the house. Most sources say that it takes at
least three years to
realize fully the savings from a lower interest
rate, given the costs of
the refinancing. (Depending on your loan amount
and the particular
circumstances, however, you might choose to refinance
a loan that is
only 1.5 percentage points higher than the current
rate. You may even
find you could recoup the refinancing costs in
a shorter time.)
Refinancing can be a good idea for homeowners
who:
- Want to get out of a high interest rate loan
to take advantage of
lower rates. This is a good idea only if they
intend to stay in the
house long enough to make the additional fees
worthwhile.
- Have an adjustable-rate mortgage (ARM) and
want a fixed-rate loan
to have the certainty of knowing exactly what
the mortgage payment
will be for the life of the loan.
- Want to convert to an ARM with a lower interest
rate or more
protective features (such as a better rate and
payment caps) than
the ARM they currently have.
- Want to build up equity more quickly by converting
to a loan with a
shorter term.
- Want to draw on the equity built up in their
house to get cash for
a major purchase or for their children's education.
If you decide that refinancing is not worth the
costs, ask your lender
whether you may be able to obtain all or some
of the new terms you want
by agreeing to a modification of your existing
loan instead of a
refinancing.
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