When To Refinance: A Rule Of Thumb For People Considering Home Mortgage Refinance


When you think of home mortgage refinance, you probably think of a potentially very significant savings in your monthly mortgage payments. If so, you are definitely barking up the right tree. The fact is that mortgage refinance can a does save people thousands per year in their mortgage payments.The truth is that, when done right, doing a mortgage refinance loan is a bit like finding extra cash in your sofa cushions that you didn’t know was there. Only, you don’t just find it once, you find that cash every month.Many people hesitate, though, when it comes to refinancing: they think about doing it month after month but never actually get around to going online to find a strong list of candidate mortgage refinance lenders. The main reason for this that most folks are not mortgage finance professionals, so they naturally do not know how to time their refinance.In short, they wonder: “How do I know if this is a good time to refinance my home mortgage loan? What is a good rule of thumb?”If you would like to understand when to refinance a home, here is a rule of thumb in 5 steps:1. Understand the overall goal of when you know to refinance:Remember that the goal of refinancing should be one or both of the following: to reduce your monthly mortgage payment and/or to reduce the total cost of your loan. The best way to do both, of course, is to take out a loan for the same repayment term (e.g., 20 years) as you have now but at a lower interest rate.2. Estimate whether you can qualify for a better interest rate than you currently have:You should start the process by estimating whether you can indeed qualify for a lower rate. Key signs that you may be able to do so include: a. you have a better credit score than you had when you took out your existing loan, and, b. average interest rates are lower now than they were when you took out your loan.3. Get an initial loan quote in order to find out estimated closing costs:To decide whether it makes sense to refinance your loan at this point, consider getting an initial refinance loan quote from your existing mortgage lender. But, do not accept it at this point – yet: you are simply doing this in order to find out your estimate closing costs, as well as to get a sense for what interest rate you could qualify for.4. Calculate your breakeven point:Now, calculate your breakeven point. The formula for this is: New Mortgage Closing Costs / (Current Mortgage Payment – New Mortgage Payment). The answer will be in months. So, for example, if your current payment is $1,500/month and your estimated new payment is $1,200/month – and if your estimated closing costs are $1,800 – then your breakeven would be 6 months ($1,800 / $300 = 6).5. Decide whether you will be in the home long enough to surpass the breakeven point:Now, decide how long you will be in your home. If you believe you will be in your home for at least as long as the breakeven point, you should get busy getting additional loan quotes and start applying!Take these 5 steps as a rule of thumb for knowing when to refinance your home mortgage loan.