Should You be Refinancing?

On April 3, 2009, Fannie Mae sent out a press release that refinancing volume reached $77 billion in March—the company’s largest refinance month since 2003. Now is a great time to refinance; perhaps you should look into refinancing your home as well.

Why Everyone is Refinancing

The main catalyst for all this refinancing is the mortgage rate. As I publish this, Lending Tree, one of the most popular refinance companies, lists the current Prime Mortgage Rate is 4.78% on a 30-year fixed mortgage on a single-family, primary residence. Dropping from a 6-7% interest rate to 5% will save hundreds each month and thousands over the life of the loan.

Help If You’re Upside Down

Typically, there is no refinance help for someone that is upside down in their loan. HOwever, Fannie Mae has a current initiative called the “Home Affordable Refinance” initiative that allows home owners to refinance up to 105% of the home value. This allows a small window for people who are upside down in their current mortgage.

When is Refinancing a Good Idea

Just because interest rates are great, it doesn’t necessarily mean that refinancing is a good idea. One of the major setbacks will be the closing costs. Expect 2-3% of the home value to be charged in closing costs. While this is negotiable, most firms aren’t going to cut much off. One possible way to avoid closing costs is to refinance with your current mortgage company. Many times they can waive part or all of these fees.

Calculate the Break-Even Point

So, assuming that you have a $150,000 home and you are considering a refinance loan, you have to expect roughly $4,500 in closing costs. Decide how much money you’ll save at the lower interest rate and how long it will take to recoup the closing costs with the money you save each month. This will give you a good idea of whether you should go ahead with the loan or not.

For instance, in the current scenario, if the homeowner will be saving $200 dollars per month, the break-even point would be 23 months. Next, you'll need to consider how long you'll be staying in the house. If it's only one more year, this scenario doesn't make much sense. However, if you'll be retiring in this home, then you need to jump on this opportunity because rates simply won't go much lower.

If this is the right time for you, then contact your lender soon to begin the process. If you'll be looking for a new lender, I recommend Lending Tree, and I'm providing a link below. With one application, they show you four different offers, allowing you to compare the banks' offers and choose the best option for you.