Mortgage interest rates set a new record low four times this year. Mortgage lenders have been very busy throughout the first nine months of the year. The rate drops throughout the year have spurred many people to action, taking advantage of the lower interest to either cut down their monthly payment or cut down the length of their mortgage.
It might seem like an easy decision to refinance. But there are a few points to consider when it comes to making the choice on refinancing:
Break Even – Generally, you need to see at least a 0.50% decrease in your current interest rate reduction to make it worthwhile to refinance. The reduced interest rate will compensate for the closing costs associated with the refinance. But it might take a year or more to break even.
Selling or Staying? – If you plan on selling your home within five years or so, it’s likely not worth it to refinance, as you’ll pay more in closings costs than you might save during that time. This works best when you think you’re going to be staying in your home over the next five years or more. If you’re not sure if you’ll be in your home long term, then it might not make sense to pay the closing costs.
30 or 15 Year? – A 30-year mortgage is most popular, but depending on your current mortgage, you may want to consider a refinance to reduce your term. You might be able to reduce the term and the payments based on your current interest rate. This works nicely if you are only a few years into your current mortgage and you have a relatively high interest rate. Sometimes you can reduce your term from a 30 year to a 15 year, and not increase your monthly payment too much.
Closing Costs – When analyzing whether to refinance or not, don’t shy away from closing costs. Paying them upfront may seem like it’s making the refinancing more expensive but remember it will save you money over the long-term.
Home Equity Line of Credit – Refinancing your mortgage may make it more difficult to use your home’s equity through a home equity line of credit. Your home’s equity is the difference between the fair market value of your house and the outstanding balance of all the loans and other liens on your property. But remember that now your home is the collateral for both your mortgage and your home equity line of credit. If you default on either, you may lose your home.
Because of the economic downturn, it may be harder to qualify to refinance. The best option is to work with your Peoples State Bank mortgage lender to see if you qualify. Contact your mortgage lender today to see if the time is right for you to refinance.