How To Know When To Refinance?
With rates at an all time low, many people are trying to determine if now is the time to refinance. Refinancing can save homeowners thousands of dollars over the life of the loan, so it is very important not to delay if the decision to refinance makes sense. There are several factors to consider when making this decision.
How Much Equity In My House Do I Have?
When trying to determine if this is the best time to refinance, the first item to understand is how much equity there is in the property. The loan to value is a huge factor in your ability to include your closing costs in the loan. As long as there is more than 5% in equity, most of the closing costs can be included in the loan. For example, if your closing costs are $4000 and there is enough equity in your house, the $4000 can be added to your loan amount so that you don’t need any money when you refinance. Also, the lower the loan to value, the better the rate and less Private Mortgage Insurance that will have to be paid. Additionally, if you have greater than 20% in equity, your Private Mortgage Insurance can be eliminated which will save more money monthly.
What Is The Break Even Point With A Refinance?
The Break Even Point is when the cost to refinance has been recouped from the monthly savings. So, if your closing costs are $4000 and the savings are $200 per month, the break even point is 20 months. All scenarios are different but typically, if the break even point is around two to three years, it is worth refinancing. Another factor to consider when calculating the break even point is how long you plan on being in the house. If this is your “forever home”, it might make sense for the break even point to be a little longer. But, always look at the fees the Lender is charging since this can extend the break even point and make it harder to refinance. It rarely makes sense to pay two or three points to refinance, which is common with many online Lenders.
Is It Possible To Change Loan Types When Refinancing?
If your scores were lower when you purchased the house, it might be a good opportunity to change your loan from a FHA to a Conventional Loan. If you did refinance from a FHA to a Conventional Loan, the Private Mortgage Insurance could be reduced or removed which would increase the savings. In this scenario, this would definitely make it worthwhile to refinance. Additionally, most people have fixed loans but if an individual has an Adjustable Rate Mortgage (ARM), it would definitely be worthwhile to see if a refinance would allow you to switch loans to a fixed rate mortgage.
Is There A Set Amount The Interest Rate Should Be Reduced To Make It Worthwhile To Refinance?
There is a widely circulated rule of thumb that says if the rate drops by 1% it is worthwhile to refinance. However, that rule of thumb is not always accurate because another factor to consider is loan amount. The larger the loan amount, the smaller the reduction in rate needs to be for it to be worthwhile. For example, a reduction of 0.5% on a $400,000 loan is a savings of over $160 per month but a 0.5% reduction on a $100,000 loan is only around $40 per month. Depending on the costs, the $400,000 refinance would be worthwhile but it probably would not be worthwhile for the $100,000 loan. So, there is no set amount the interest rate should be reduced to make it worthwhile since there are many other factors to consider. Make sure you talk with a Mortgage Banker to help advise you based on your scenario.
So, if you are looking to refinance in Columbia, Lexington, Chapin, Blythewood, Sumter, Irmo or anywhere in South Carolina, please give us a call so that we can help determine if a refinance makes sense for you. There are so many factors that determine if this is a good time to refinance and we would love to offer a free consultation and help in any way possible. Call us today at (803)261-9267!