Refinance Your Mortgage
Mortgage rates are coming down so when does it make sense to refinance your mortgage? There are several reasons to refinance, but most commonly, it’s to get a lower interest rate.
In my book, I talk about how I refinanced twice. Because of my bankruptcy, I started with a 2-year adjustable-rate mortgage at 8 3/8%! At that time, that interest rate was pretty high but my credit scores were in the 500’s. At the end of the second year, I would have to refinance the loan. My plan was that my scores would improve enough in those two years to get a better rate. Towards the end of my 2nd year, my financial planner recommended I try to refinance again. My scores improved enough so that I reduced my interest rate to 5.75% on a fixed 30-year loan. That was over a 2.5% interest rate drop so I did it. My financial planner must have had a crystal ball because within 6 months of my refinance, 2008 happened and the interest rates climbed significantly. Finally, in 2010, I did my final refinance. My scores were now in the mid 700’s and I was given an interest rate of 4.25%. Again, the rate drop was 1.5%. Significant enough to make it worth my while. Anything over 1% or more is usually worth it.
When you refinance, there are closing costs every time you do it. For my initial mortgage, I paid them out of pocket. For the 2nd two refi’s, I rolled the closing costs into the mortgage. I also used a break-even calculator to figure out how long it would take me to break even on a new mortgage. You want it to take no more than 2 – 3 years. Plan on staying in the home at least until your break-even point has passed. I used Bankrate’s Mortgage Refinance Break-Even Calculator to compute this figure.
Moral of the story:
Refinancing your mortgage can be a great strategy to pay your home off sooner and build wealth. Compare a few lenders. Figure out your break-even point, then apply. Determine if your interest rate is worth shortening the term to pay it off sooner. Remember, while you’ll pay a 15-year mortgage off quicker, your payment will be higher than a 30 year.