Rates are low, home values have declined, employment is iffy. Times are very confusing for homeowners. Many are questioning the timing for a loan modification and if so, why refinance?
Simply and obviously stated, homeowners should only consider refinance when there is either an immediate monthly savings or to provide protection from future events.
Why Refinance If I Will Have To Pay Fees Or Points?
According to a 2009-2010 study by Bankrate, the national average for closing costs for a $200,000 mortgage was $2,732. With this mortgage value, if you plan to stay in your home for 4 years or more, a rate reduction of at least 0.5% (a 6% rate down to 5.5%) will most likely reduce your monthly payments enough to make up for your fees within 4 or fewer years, with additional substantial savings (almost $23,000) over the life of the 30 year loan.
There are things to keep in mind. These calculations assume that you still have an 80% or lower loan to value (LTV). If your home has depreciated to a point of increasing your LTV above this point, refinancing will now require you to pay private mortgage insurance (PMI). PMI usually increases your mortgage payment by 1%. In this case, refinancing would be counterproductive.
Why Refinance If My Payments Are Low Right Now Or I Am Currently Making Comfortable Interest Only Payments?
“Right now” implies that you have a variable or adjusting rate mortgage. It’s safe to assume that with interest rates at or near historic lows, they’ll only go up. You need to immediately pull out your Promissory Note from your original loan package. Determine what the maximum rate increase can be on an annual and lifetime basis.
Usually rates can’t adjust more than 2% annually and 5-6% over the lifetime of the loan. Let’s take the same $200,000 mortgage from the example above. A 2% increase in your rate would increase your payment by $200 – $300. A 5% increase would increase your payment by over $600. If you can’t budget for that payment, you may have no choice but to refinance. If you will need to pay PMI after the refinance, it may still be worth it.
In both situations, you need to analyze why refinance might be a viable option. Your mortgage lender can give you the precise figures you’ll need to analyze your cost benefit. Remember, the lender is there to provide you with the facts, not to make your decisions. Do NOT agree to anything unless you fully understand your costs and the terms of the loan.