When is the right time to refinance?
There are three main things to consider when thinking about refinancing:
- The interest rate
- How much it costs to refinance
- How long you are plan to live in or own the property
If you’re thinking about refinancing, your current bank or lender might not be the best place to go for advice. Why? Because they make money from servicing your mortgage and if you refinance with someone else, they will lose that income. Talk to an independent broker to get competitive rates and to research scenarios that will work best for you.
Know your break-even point.
There are a variety of rate and closing cost options available to most borrowers. Typically when deciding if a refinance makes financial sense, you should look at two different types of break-even analysis.
How long you’ll have to live in or own the home you are refinancing to recoup the closing costs and maximize the interest savings. For example, if you are going to save $100 per month on your interest and the closing costs on the new loan are $3,000, you will need live in or own the house for the next 30 months or 2.5 years to recoup the costs that you paid to refinance. As long as you’re planning on living in the home for at least the next 30 months or 2.5 years, it should make sense to move forward with a refinance.
Get the best rates available and an appropriate closing cost.
Next analyze the interest rate and amount of closing costs you should pay. Your mortgage broker should be able to give you three different interest rate and closing cost scenarios for review. Usually, the lower the rate, the higher amount of closing costs you will pay. You might even have a no-closing cost option available at a slightly higher interest rate. How long you plan to live in or own the property will determine which is your best fit.
A good mortgage broker will be able to recommend an option that is right. If your bank, credit union, or mortgage company can’t walk you through these options, look elsewhere.
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