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Should I Refinance My Loan?


With interest rates as low as they are, you might be thinking about refinancing your home to take advantage of the lower rates. In many cases, a homeowner can refinance into a much lower rate, which in turn can save them a significant amount on their monthly mortgage payment. But a refinance won’t make sense for everyone, and it’s important to discuss with your loan officer the details of your specific situation.

When considering a refinance, the following are a few things you want to consider:

1. How much lower will my interest rate be if I refinance? Generally speaking, it only makes sense to refinance your loan if your new interest rate is at least 1% below your current rate. With a 1% lower interest rate, you should see your monthly payment drop by at least $100. For example, if your current loan amount is $300,000, with a 30 year fixed interest rate at 6.25%, your monthly P & I payment is around $1850. If you refinanced with a lower interest rate of 5.25%, your monthly P & I payment is now only about $1650, saving you $200 a month!

2. How long will I be in my home? Remember, since a refinance is starting up a new loan, there will be closing costs involved. It’s a good rule of thumb to say that closing cost will equate to 1-3% of the loan amount. For example, if you consider the same loan amount of $300,000, you can expect closing costs of at least $3,000. When you take into account the cost of a refinance, it is important to determine whether or not you will be in the home long enough to benefit from the monthly savings. Again, let’s take a look at the example above in which we lowered the interest from 6.25% to 5.25%. In order to determine how long it will take for the monthly savings to equal the cost of refinancing, we will use the following equation:

closing costs / monthly savings = number of months till you break even

$3000 / $200 = 15 months

In this example, you will need to be in your home at least 15 months to have accumulated enough monthly savings to break even with the refinancing costs. If you do not plan on staying in your home long enough realize these savings, it wouldn’t make financial sense to refinance.

Your home is your most important investment, and a key component to the health of your financial future. Before you refinance, ask yourself the above two questions, and discuss your options with your mortgage professional. Throughout this week, I’ll be going over more details of the refinancing process. Feel free to contact me at anytime at (562) 972-0351 with any of your questions. For more information on refinancing your mortgage, including mortgage calculators and a checklist, visit my website at www.AlissaAlvarez.com

Categories: Loan Process, Refinance
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