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Is Refinancing Right for You?

July 9, 2012

This is part two of a three part series on refinancing.

Part One: The Best Reasons to Refinance

With interest rates at all-time lows, many homeowners are considering refinancing their homes. But before you begin the process, it’s important that you determine if refinancing your home is right for your particular financial situation. Here are some things to keep in mind.

Let’s start with examples of when refinancing is not the right thing to do. If you’ve had your mortgage for a long time, refinancing doesn’t always make sense because you’ve already built equity in your home and are close to paying off the loan principal. Refinancing would pay off your existing mortgage and create a new one where the amortization process will start over with you paying more in interest than paying down the loan principal. If your current mortgage has a prepayment penalty, a fee lenders charge to pay off your mortgage as well as a fee for refinancing, you’re better off refinancing with the same lender as the fee can sometimes be waived. But if you’re considering another lender, you’ll have to determine if paying the prepayment penalty and refinance costs will increase the time it will take you to break even from the monthly savings you expect to gain. Another scenario when refinancing may not be the right thing to do is if you plan to move in the next few years. You may not live in your current home long enough to recover your refinancing costs that are often realized a few years later (the break-even point).

Part of what helps many homeowners to determine when the break-even period will occur is by using the following calculation. To determine your break-even period, take your current monthly mortgage payment and subtract what your new monthly payment would be. Let’s use the example of a $200,000, 30-year fixed-rate mortgage at 5% and a current loan at 6%. We’ll also assume that the closing fees for the new loan are $2,500. So your existing monthly payment is $1,199 and your new monthly payment would be $1,073, giving you a savings of $126 a month. Next subtract your tax rate from 1. If you’re in the 28th percentile you should get 0.72. Take this tax rate figure and multiple it by your monthly savings (0.72 x 126). This equals $91 or your after tax savings. Next divide the total refinancing costs by your monthly after-tax savings ($2,500/$91). You should come up with 27 which is the number of months it will take you to recover your refinancing costs. So if you plan to stay in your existing home longer than 2 years and 3 months, then refinancing may be right for you.

If math isn’t your thing and this calculation seems intimidating, a Homestead Financial Mortgage Loan Officer can run the numbers for you so you can compare Homestead Financial loans to determine what refinancing is best for you. They can even calculate if you’ll receive the financial benefit from refinancing in one, two or even three years so you can compare this to your plans for staying in your home.

However, if you have a mortgage that’s only a few years old and you plan to stay in your home indefinitely, then call Homestead Financial Mortgage so our loan officers can determine if you qualify for today’s low monthly mortgage rates. You can only take advantage of the savings that come with refinancing when you call to get the process started.

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- Jayson Hardie on Growth

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