When is the Right Time to Refinance Your Mortgage?
Written by Lee Wyatt (last updated August 23, 2013)
Have you ever noticed how a persons financial standing never really stays static? It is either rising or falling, generally doing one or the other in an almost cyclic process. As such, there may be several different instances when a person may want to think about restructuring their home finances. One of the most common ways that people do this is by refinancing a mortgage. But when is the right time to refinance your mortgage? Use these guidelines to decide whether the time is right for you.
- Break even period. One of the most important reasons for refinancing a mortgage is to save money, and that should also include the refinance costs as well as the long range payments. This can be decided by looking at the break even period, which is the period of time that the interest savings will pay for the refinancing costs. Generally speaking the larger the spread is between the new interest rate, and the rate of your current loan, the shorter a break even period you will have. Typically you want to have as short of a break even period as possible.
- Traditional vs. current reasoning. Traditionally people were told that they should only refinance on their mortgage when a difference of at least two percentage points was present. This would almost always guarantee a huge savings over the long run. However, the traditional reasoning should only be implemented when the interest rates are in the double digits. Currently, the interest rates are around six percent. If you are looking for a proportionate amount of savings when the interest rates are as low as they are now, you should look into refinancing whenever you hear about rates that are lower than what you currently are paying.
- Avoid ARMs. One word of warning needs to be expressed about refinancing your mortgage. In the simplest, and most straightforward language possible, you need to avoid adjustable rate mortgages (ARMs) as if they were the plague. While these types of mortgages are extremely attractive due to lower initial costs and low initial monthly payments, over time that will change. For the most part ARMs have extremely high monthly payments after a few years, and when you first look at these mortgages those payments seem like they are way off in the future, and that you will always be able pay off the principle early. The truth is, that never really happens, and the higher payments always come due before you are ready, and it is always a struggle to meet those payments.
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