When does it make sense to refinance?

Now may be just the time to refinance.  There are a few factors to consider, such as current loan balance, whether or not you are paying mortgage insurance and the length of time left on your mortgage. You can do multiple things when you refinance--lower your monthly payments, keep the payment the same or slightly higher but shorten the length of the loan, or pull out some cash and pay off high rate credit cards, college tuition, home renovations, buy an investment property or second home or take that dream vacation. 

Here are a few things to consider:

The current rate is .5% lower than your current rate

The old rule of thumb was that you should refinance if you could get a rate that was 1 to 2 points lower than your current one. Well, the rules have changed, because rates in recent years have been at historical lows, so a half point drop makes up a larger percentage of your existing rate.  The principal balance of your current loan will also be a factor.

You should add 5 years or less to the length of your loan, reducing the years would be even better.

Many people refinance into the same type of loan they started with out of habit. That can be a money mistake. If you are several years into a 30-year mortgage, you may not want to sign up for another one because the money you save with the lower interest rate you will lose by stretching out your payments over several more years. Solution? Say you have only 23 years left on your existing mortgage. Refinance into a 25-year loan so you are not adding more than five years or -- better yet -- refinance into a 20-year mortgage and pay it off even more aggressively. This may be different if you need to refinance to lower your payments because of changes in earnings or additional monthly expenses for things like college tuition, medical expense etc. 

You should be able to recover your closing costs in 2 years or less

Closing costs are the elephant in the room when you refinance. You've got to make sure the new, lower interest rate is worth it given the sometimes hefty fees you have to pay to close the loan. If you plan to sell the house before you have recovered the closing costs you must pay to refinance, that is the No. 1 deal breaker. To figure this out, all you do is divide the cost of closing by your monthly savings to see how long it's going to take for the new loan to pay for itself. I suggest the one to two -year cutoff for recouping closing costs simply because stuff happens, life changes and you want to know you are out from under those closing fees should you need to sell unexpectedly.

You are thinking of buying a new house in the future and renting your current one

Some folks hope to move in the next few years but want to keep their current home as a rental for passive income.  If this appeals to you, you may want to look into refinancing NOW to lower the payments for when you rent the property later.  This will help you with cash flow on the rental and help you cover your costs.  If you wait until the property is identified as an investment property the rate will be higher and the loan to value requirement will be 25% of the equity.

If you think refinancing may be a good option reach out to your mortgage lender.  If you don’t have someone you know and trust, reach out to me.  I have folks I work with I trust will give you good advice and provide excellent service.