Refinancing… When does it make sense?

There are several reasons why one would refinance.  The most common type of refinance is a rate and term refinance. This occurs when market interest rates have gone down and a borrower has the ability to reduce their interest rate by 15% or more. So if your rate is 5%, you should be aiming to get that rate down to 4.25% or less for it to really make sense.  Here is an explanation.

Rate/Term – When rates go down, it may make sense to try and refinance your loan to the lower interest rate.  Depending on your loan size, the local closing costs and your short/term and long term goals, reducing your interest rate may make sense for you!

Here are some examples of your options.

  • Reduce Rate and Reduce Term
    • When rate goes down, monthly payment goes down. When Term goes down, monthly cost goes up. Finding the right balance between rate and term will determine if this makes sense for you.
      • If you are okay with your current payment, or you are even ok with paying a little more every monthly, reduce the rate and choose a term that will yield the desired monthly payment, that is less then your current term
        1. You will pay your loan off a few years earlier and save a lot of money over the life of the loan. Your month to month will be similar.
      • If want to reduce your monthly payment
        1. Reduce the rate, and increase or keep the term the same. This will reduce your monthly payment and often still yield a similar or lower cost of loan over life.
      • Getting rid of or reducing PMI – Private Mortgage Insurance
        1. Sometimes, you may even take a little bit of a higher rate but because you are eliminating PMI, it makes sense. This is often the case when you have an FHA loan and are now able to qualify for a conventional loan. If you have a 3.75% rate but the PMI is $300 per month, it may make sense to take a 4.25% rate which is higher, but because you are getting rid of the $300 PMI, you are saving money month to month and over the life of your loan.

Summary:

Rate and Term Refinancing is a great tool to either save you money month to month, or save money over the life of your loan. Bottom line is, you should be monitoring the current market rate in relation to your interest rate so you can make sure your finances are in check. If your mortgage loan officer isn’t reaching out to you to make you aware of the possible benefits of refinancing, give us a call and we will make sure you are update over the life of your loan!!

 

 

info@evomtg.com

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