Is It Worth It to Refinance?

by Vic Bassey

With financial markets fluctuating constantly, it can be hard to know when it is a good time to refinance. In some cases, a homeowner can throw some numbers into an ‘Is it worth refinancing calculator’. However, it is still best for a homeowner to understand how it works in order to make his own decisions regarding the best time to refinance the mortgage. After all, both the savings and the expenses will be solely the responsibility of the homeowner. A few pointers can help determine if and when it is worth it to refinance.

Percentages and Points

Traditionally, mortgage experts state that watching interest rates is important when homeowners are considering refinancing. If the prevailing mortgage rates go down at least one interest rate point, then it can be worth it to refinance. However, this is a bit too simplistic for most people. In order to adequately answer the pressing question of is it worth it to refinance, it helps to break down the bottom line. In most cases, the monthly payment in relation to the additional closing costs will be the deciding factor in determining the question of is refinancing worth it.

For a simple example, it can help to break down the numbers and do a comparison. Closing costs average around $3,000 for a standard home. Depending on the property value, the owner may pay a bit more or less. If the current payments are around $1,800, it may be possible to save as much as $200 per month by refinancing. Still, is it worth it to refinance?

Long-term or Short-term Plans?

The answer to the pressing question of when is it worth it to refinance your mortgage will depend on how long a family plans of living in that home. By dividing the $3,000 in closing costs by the monthly savings on $200, it is easy to determine that it will take 15 months for the home in this example to begin “making money” on the refinance. If a family is likely to move to a different home before those savings are realized, then refinancing doesn’t make sense. If, however, a long-term residency is most likely, the savings can begin to accumulate after that 15-month period and this family can comfortably determine that refinancing is in their best interest.

Is It Refinancing Worth it When There are Other Factors?

Whenever a homeowner does this exercise, however, it’s crucial to figure all factors into the equation. There is more expenses to refinancing than just the closing costs. There can, for example, be penalties for paying off one mortgage early to obtain another. The above equation still works as long as the homeowner adds in these other fees and penalties. If homeowners ask is it worth it to refinance and neglect to dig deep for the sometimes hidden costs, they can end up in a mortgage that was more than was expected, which can be a worse situation than the initial mortgage. Again, gather the numbers and use an is it worth it refinancing calculator if doing the math yourself is uncomfortable.

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