How to determine whether to refinance can seem big and confusing
, but in reality when broken down into simple facts it is all just simple math. Take the time to write down all the math you do and it will be easy to see in front of you whether it will pay to refinance.
If you are refinancing a loan that is not a mortgage things are much simpler. You go to a financial institution, see if they'll give you a lower interest rate because interest rates have considerably dropped and your credit has improved since originally obtaining the loan. If you get the lower rate you are good to go!
For homeowners the process is a bit more complicated.
Refinancing means to finance again. This means that for all essential purposes you are getting a brand new loan for your home. The first thing to look at is the closing costs on your current mortgage. A lot of, but not all, mortgages have closing costs that can be quite costly. You should be able to find this information in your loan terms.
You'll then want to look at the opening costs for your new loan. These will be extremely similar to the first time around. You'll probably need to have your home appraised again. Some costs to consider: title and mortgage insurance, lender attorney review fees, application fees, and if you have a second mortgage that will need to be taken care of first. While these cost totals are different in every situation you can expect to pay 3-6% of what is left on the loan in opening costs.
The last part to consider is your new interest rate. As a general rule of thumb to determine whether to refinance see if you can find a 2% lower interest rate.
Now that you have your total upfront costs and a lower interest rate, calculate out how much money the lower interest rate will save you both over the total length of the loan and on monthly payments. Then figure out how long it will take for you to start saving money and the lower interest rate pays off all your upfront costs. Will you still be living in the house then?
As you can see, how to determine whether to refinance is really just a math game.