“Does It Still Make Sense to Refinance in Today’s Market?”by Tim Manni
We had the opportunity to lend our expertise to the folks over at GetRichSlowly.org (GRS) as they prepared their latest post: “Does It Still Make Sense to Refinance in Today’s Market?“.
GRS author J.D. refinanced his mortgage last winter, effectively cutting the interest rate on his loan from 6.25% to 4.96%. Over the years, J.D. has done a lot on research of refinancing — both for his own purposes, as well as for a book he has written — but allowed us to share some of the basics with his readers:
[Tim] Manni says that the obvious reason people refinance is to save money. They want to lower their interest rates. That said, people do refinance for other reasons, including:
- Changing mortgage types (from an adjustable rate to fixed rate, for example)
- Consolidating debt (which isn’t always the best move)
- Tapping home equity (while avoiding a second mortgage)
Manni says that the old rule-of-thumb was to refinance when mortgage rates had dropped 2% below your current loan. “But waiting around for mortgage rates to drop two percent can wind up costing you time and money in the long run,” says Manni. “For some homeowners, refinancing to a new interest rate as little as half a percentage point less than your current rate could be enough for substantial savings.”
How can you tell if refinancing makes sense for your situation? Easy. Crunch the numbers. HSH.com and U.S. News & World Report have a refinance calculator, for example, that lets you calculate your change in payment, and shows you how long it will take to recover any costs associated with refinancing your mortgage. (There are dozens of other refinance calculators out there that will provide the same basic info.)
Manni says that it’s important to understand the costs involved in refinancing your mortgage. “The more it costs you to get your new loan, the longer it will take to recoup those costs. It’s important to have your refinance work to your advantage.”
Closing costs for a refinance are about the same as for a normal mortgage, or can even be higher if you don’t have much home equity. If your goal is refinance to a lower interest rate, HSH.com’s Vice President Keith Gumbinger says, “It’s generally best to refinance when the savings from your lowered mortgage rate will allow you to recoup the price of closing costs in 24 months or less.”
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For those of you who are unfamiliar with GRS, it’s an extremely popular personal finance website which tackles a wide variety of topics — everything from gift giving over the holidays, to eating healthily and cheaply.