When Should You Refinance Your Mortgage?

If I had a mortgage, I'd be looking at whether or not I should refinance it. Rates have dropped enough recently that it might save me some good money. And though I don't have a mortgage, many readers here likely do, so I thought I'd post on an MSNBC piece that lists when you should and shouldn't consider refinancing. But before we get to those, let's look at their general rule-of-thumb on when it makes financial sense to consider refinancing:

Many lenders say closing costs related to a refinance aren’t worth it if you’re shaving less than 50 basis points (0.5 percent) off your current interest rate, or 25 basis points with no closing fees.

Wow, things have changed a lot since I had a mortgage in the Dark Ages. Back then, the rule was to make a switch only if you saved 200 basis points (2% interest) so you could cover all the associated fees. I guess fees have dropped a bit since then, huh?

Ok, now on to their lists. Here's when you should consider refinancing:

• You have a fixed or adjustable mortgage with an interest rate over 6 percent.
• Your credit score is over 650.
• You live in an expensive urban market and have a mortgage over $417,000.
• You’re eligible to refinance to an FHA loan.
• You have at least 10 percent equity in your home and aren’t FHA-eligible.

And now the list for when you shouldn't consider refinancing:

• Your interest rate on a fixed loan is below 6 percent or you plan to move soon.
• Your credit score is below 650 or your credit report has blemishes.
• You have less than 10 percent equity in your home.
• You live in a “declining market.”
• You’re self-employed or want to pursue a “stated income” or “no-doc” loan.
• You’re facing foreclosure.

Can't say there are really any surprises here. If you have good credit, a higher-rate loan, and any sort of decent equity, seems like you should be set. Others may find the road a bit harder to travel.

Anyone out there refinanced yet? Anyone planning to? Or maybe you're waiting for rates to drop again?

Comments

[Kyle]

I'm thinking about it. I have a 30 year fixed at 6.35% and I got a call from Chase (my current servicer) offering to waive all closing costs and origination fees if I refinance with them. Maybe the banks are getting desperate for customers with good credit.

[Jeremy]

Might have to wait a while...

http://www.thetruthaboutmortgage.com/mortgage-rates-climb-back-to-levels-in-november/

I was a little upset when we locked in at 6.5 and saw rates drop through December and January. Not so much anymore...

[Robert D. Ashby]

The reality is that there is more that goes into the equation than what is listed. Things like wanting to use extract idle equity for investments or added liquidity, maybe even seizing opportunities to expand your real estate portfolio during this downturn. There are also times when refinancing may look right on paper, but really isn't in your best interests.

[Dennis]

Hey FMF,
I've been reading your blog for a while now but never commented yet. Instead of going out to lunch now, I bring something to work and read your blog everyday. I especially like the christian perspective. Keep it up brutha.

[First Step]

We just refinanced at the beginning of this month, and we locked a rate of 5.5% in mid-January.

[Kevin]

I'd probably refinance to eliminate the 2nd mortgage if we were going to stay longer in our current home. But right now it doesn't make sense for us since we are probably looking at moving this year or next summer.

[Foobarista]

As it happens, we just closed on our refinance from a 5.875% 30 year fixed to a 4.625% 15 year fixed with no cash out. We'll pay about $250/month more in payments but we'll pay almost $1K/month in principal with the first payment versus only $350/month principal paydown after being 7 years into the 30 year.

[Rich Guy]

Just refinance a $220,000 mortgage and cut the interest rate from 6.25% to 5.625%. In addition we now have 20% equity in our home so we eliminated a $150 PMI charge from our monthly payment. Total monthly savings is $300 so we will recoup the refi costs within 6 months. No way I'm paying off this low cost new loan early at my age (35)

[Peter]

We're refinancing right now - from a 6.5% rate to a 5% rate on a 30 year fixed. We'll end up saving about $200 a month on our monthly payments. The payback period for refinancing - about 13 months for us. We're happy with dropping 1.5% on our rate!