When Is the Right Time to Refinance?

Refinance Home Loan: When Is the Right Time?

As mortgage rates hover at historical lows, many homeowners are running out to refinance. But the benefits of refinancing vary depending on your personal situation. The right time for your neighbor or family member may not be the right time for you. Learning how to analyze your home loan situation is key and will help you decide if refinancing makes sense for you. Here are two big considerations:

How Long Do You Plan to Be in Your Home?

Your first stop should be to analyze how long you will realistically live in or own your home. Remember, there are up-front closing costs associated with refinancing a home. For a $200,000 home mortgage, these costs can hit the $4,000 mark.

Whether you pay for the closing costs out of your own pocket or roll the costs into the new home loan, you should consider these costs when timing your refinance. A typical time frame – when you can expect to recoup your closing costs prior to leaving the home – is about four years. But this can vary depending on your mortgage amount, and the monthly savings between your old and new mortgage payments.

If, for instance, you know that in one year, your job will be transferring you to a new city and you’ll have to sell your home, then refinancing most likely doesn’t benefit you in the long run. Even if your monthly payments are lower, you’re probably not going to recoup your up-front refinancing costs before you hit the road. On the other hand, if you plan on living in the home for many more years, then the up-front expense of refinancing to lower your monthly mortgage payment may well be worth it.

Whatever you do, make sure your decision is based on facts and figures rather than the emotional response of a lower interest rate and lower monthly mortgage payment. You can also conduct a breakeven analysis to determine whether a refinance is wise:

How to Conduct a Break-even Analysis

While a true break-even analysis requires numerous factors to be considered, like points, monthly earnings, lost interest earnings, there is a basic formula you can use to give you a general idea if you should consider refinancing:

Total amount of refinance costs =  Number of months to break even
Total amount of monthly savings

For example, if your closing costs to refinance are $4,000 and the amount you save on your monthly mortgage payments is $200, then it would take you 20 months to recoup your costs ($4,000/$200=20 months). As long as you intend on living in the home for at least 20 months, then it’s likely worth refinancing. If your stay is shorter, then it may not financially benefit you to refinance.

The moral of the story is that lower interest rates do not automatically equate to running out to refinance your home loan. However, with mortgage rates as low as they are now (the lowest in 50 years), you should at least take a look at your situation. Use a logical approach to calculate whether the lower rate truly benefits your financial picture as a whole rather than only in the short-term.

To find out if you can save money with a new home loan or pay off your mortgage sooner, visit Quizzle.com, where you’ll get free personalized home loan recommendations. Or contact our partner, Quicken Loans, to discuss your options with a Home Loan Expert.

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  • 4 Reasons to Refinance Your Home Loan
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