As mortgage rates for 30-year home loans slowly climb higher, now is a good time to stop and think and think about refinancing or re-refinancing that mortgage you’ve taken out.
Refinancing can not only save you money off your monthly payments, it may also shorten the duration of your home loan. In some cases, it may be possible to accomplish both of these goals at once.
Millions of people have already taken advantage of programs like (HARP) the Home Affordable Refinancing Program to save a lot of money off of their mortgage. Some may even be thinking about the refinancing a second time. It doesn’t always make financial sense to refinance a home loan two or even three times, but it can if you know what to look for.
The Best Time to Refinance Once More
To state the obvious, refinancing only makes sense if it’s going to save you money or put you in a better financial situation. You only save money through refinancing if the rate at which you’re refinancing too is lower than the rate you currently have. For example, refinancing from 6% to 4.5% is going to make a huge difference in how much you pay in the long term.
Of course, some refinancing options may shorten the duration of a home loan and make monthly payments larger. In this situation, however, the homeowner would still be saving money in the long run because they would be paying less money over time in interest.
So, even if you’ve refinancing only a year ago, it will most likely to make sense to refinance again and lock in a low rate if interest rates are falling. For the time being, that simply isn’t happening though. Interest rates are at best remaining stable or slowly going up. This means that most people who have refinanced in the last 2 years will likely have lower rates on their home loan than is currently being offered on the market.
When Refinancing May Not Make Sense
Refinancing isn’t free so being strategic about when to refinance is always important. There is a certain point at which it no longer makes sense to refinance because you will actually be spending more on closing costs and other fees than you will be saving.
The general rule of thumb is that refinancing only makes sense if you can drop the interest rate on your home loan by at least 1%. But there are sever other factors that you may want to consider. Among these factors is how long you plan on staying in the home that you’re refinancing for.
Here is one way for you to determine whether refinancing will make sense. First, find the difference between your old mortgage costs and what you’ll be paying after refinancing. If you pay $1000 now and will pay $900 after refinancing then this number will be $100. Second, divide the closing costs of your new loan by the monthly savings. This will give you an idea of how long it will take before you break even. If you only plan on being in a house for another 3 years, but it will take you 4 years to break even, then refinancing obviously wouldn’t make sense.