This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.
Q: Joe, I have been reading about low mortgage rates. How can I know whether I should refinance my mortgage?
A: Because interest rates are down, this is a great time to consider refinancing. You will need very good credit to get the best rates, but it is worth checking on.
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So how do you know if it is right for you?
You will be spending money up front for the loan, but you will be saving money each month because your interest rate will be lower. Therefore, you will need to calculate how many months it will take to recoup your up front cost. If you are going to live in the house at least that long, you should refinance.
If, for example, your current mortgage is 8% on a $100,000 loan to be paid in 10 years, your monthly payment is $1213. If you can get that 8% lowered to 6%, your payment will drop by $103 each month. So far, so good.
What are your upfront costs?
The lender tells you that you will be paying one point and $2,500 closing costs. The one point is one percent of the loan amount, or $1,000. Added to the $2,500 closing cost, your upfront costs total $3,500. Divide your monthly savings into the upfront costs to learn how long it will take to break even. In this case, $3,500 divided by $103 equals 34, which means you will break even after 34 months.
This is great if you plan to stay in the house for more than 34 months; not great if you think you will be moving soon. If you stay the entire 10 years, you will save a total of $8,860.
Hint: Shop for your best deal.
Tell your prospective lenders you do not want to pay points or origination fee. With the current competition for these refinance loans, they may just listen. Now is a great time to refinance your home so go save yourself some money.