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A
general rule of thumb is that refinancing becomes worth your while
if the current interest rate on your mortgage is at least two
percentage points higher than the prevailing market rate. This
figure is generally accepted as the safe margin when balancing the
costs of refinancing a mortgage against the savings. There are other
considerations, too, such as how long you plan to stay in the house.
Most sources say that it takes at least three years to realize fully
the savings from a lower interest rate, given the costs of the refinancing.
(Depending
on your loan amount and the particular circumstances, however, you
might choose to refinance a loan that is only 1.5 percentage points
higher than the current rate. You may even find you could recoup
the refinancing costs in a shorter time.)
Refinancing
Can Be Good For Homeowners Who ...
...
want to get out of a high interest rate loan to take advantage of
lower rates.
This
is a good idea only if they intend to stay in the house long enough
to make the additional fees worthwhile.
...
have an adjustable-rate mortgage (ARM) and want a fixed-rate
loan to have the certainty of knowing exactly what the mortgage
payment will be for the life of the loan.
...
want to convert to an ARM with a lower interest rate or more
protective features (such as a better rate and payment caps) than
the ARM they currently have.
...
want to build up equity more quickly by converting to a loan
with a shorter term.
...
want to draw on the equity built up in their house to get cash
for a major purchase or for their children's education.
If
you decide that refinancing is not worth the costs, ask your lender
whether you may be able to obtain all or some of the new terms
you want by agreeing to a modification of your existing loan instead
of refinancing.
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