When to Refinance

Refinancing an existing mortgage may save you a substantial amount of money in interest payments over the life of your mortgage.

Though there are several factors to consider when determining whether there would be a net gain, most analysts cite a two percent “rule of thumb.” This practical suggestion applies in instances when the interest rate drops to two percent below that of the interest rate you are currently paying. At that time, it is considered highly beneficial for you to refinance.

However, this is only a generality, whether you see a net gain will depend on your own situation, and whatever fees, points, and upfront costs you may incur in the refinance deal. Also, take into consideration the amount of time you plan to stay in the home. Refinancing a home will not produce any net gain in most cases if you plan to sell the home within three years.

Most lenders will help you calculate a “break-even” point, to pinpoint the amount by which refinancing outweighs the additional costs of having to undergo the refinancing process. Refinancing may cost as much as the original loan in terms of closing costs, usually about one percent of the loan amount.

Refinancing has become very popular since interest rates have dropped to historic lows over the past few years. Many more people are taking advantage of refinancing deals to obtain cash from their equity, or just to make lower payments. For those who have an adjustable rate mortgage, locking in a fixed rate when interest rates drop significantly is also a very wise move.

On account of the way the Fed looks at home refinancing as a boon to the economy, they deem it important to lower interest rates to encourage such activities. The Fed lowers rates to stimulate the economy. By lowering the rates, people are strongly motivated to refinance, and people who do so have extra money to spend, either from lowering their monthly payments, or from taking equity out of their homes. That extra money gets spent on goods and services, which in turn increases demand, stimulates employment, and, the country’s economic environment gets just a little better all over the country.