With the potential for interest rates to rise in the coming months, is now the time to consider refinancing your current home loan? There are many reasons why you may want to refinance your loan, but the best way to decide if you should refinance is to compare the numbers. What will your monthly payments be with the new rate? How much will you save each month over what you are paying now? How long will it take you to recoup the costs of refinancing?
If you have to pay $2,000 in points to get a lower rate that will save you $100 a month on your mortgage payment, it will take you 20 months – nearly 2 years — to recoup your costs.
If you plan on being in the home longer than the time it takes to recoup these costs, refinancing may make sense. But if you plan to move before you can recover those costs, you should consider refinancing only if you can get a no-points deal. Unfortunately, you may have to settle for a higher interest rate that may not be significantly lower than what you are paying now.
When deciding whether to refinance, you should also consider the terms of the new mortgage. You can use a refinancing to convert an adjustable-rate mortgage into the stability of a fixed-rate mortgage. If rates rise in the future, you’ll benefit from a rate that won’t rise. You could also shorten the term of your mortgage – for example, refinancing a 30-year mortgage into a 15-year mortgage – that will save you tens of thousands of dollars in interest over the life of the loan.
To decide if you should refinance, play with the numbers. There are many mortgage calculators available on the internet. Use one to find out how much a lower interest rate will save you each month, how long it will take you to recoup your costs, or how much you will save over the life of the loan by refinancing into a shorter term mortgage.