If mortgage rates are low, should I refinance?

By Jim Micheals

If mortgage rates are low, should I refinance? Find out here whether you should refinance your loan and take advantage of low rates!!

With mortgage rates at all-time lows, many people are considering refinancing their mortgage. Before refinancing a mortgage, everyone needs to take into consideration their own personal situation and consider if they should refinance and take advantage of the low mortgage rates. This article focuses on three things that need to be considered prior to refinancing a loan.

Cost of a Refinance

In today’s lending economy, lenders are charging much more in fees for mortgage refinancing than ever before. Lenders typically charge “points” of up to 2% of the loan balance plus additional closing costs including appraisal fees, legal fees, and title fees. Closing costs can be as high as an additional $2,000. For a risky mortgage with a $200,000 balance, a bank may charge $4,000 in upfront points plus $2,000 in closing costs, so a total of $6,000 may need to be paid by the borrower.

Monthly Interest Savings

The first thing that needs to be considered when refinancing is what your monthly interest savings is. If you have a $200,000 mortgage outstanding, and a 6% interest rate, you will save $250 per month in interest by refinancing into a 4.50% interest mortgage. This is calculated simply by taking the loan balance times the interest saving divided by 12 ($200k * (1.5%) / 12 = $250).

How Long Until You Break Even

Finally, before refinancing to a lower mortgage rate, you need to determine how long it will take to break even. To determine how long you need to keep the mortgage before breaking even on the refinance, you must divide the total cost by monthly savings. Using the previous scenarios, it would take the borrower 24 months ($6,000 / $250) to break even. If they plan to keep the mortgage for more than 24 months, refinancing makes sense.

If mortgage rates are low, should I refinance?

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