Knowing When and When Not to Refinance a Mortgage

Refinance a Mortgage

Mortgage in MinneapolisAs interest rates continue to hover at near historic lows, many homeowners across the country are taking advantage of this by refinancing. If your mortgage is much more expensive than what is offered on the market right now, it might be time to pay it off by taking out a new one. But, as attractive as the lower monthly payments might be, is this actually worth it?

Homeowners should always do the math before making significant changes to their home loan, since the actual savings may be different from what they expect – even if mortgage rates Minneapolis homeowners may get are very attractive right now. Refinancing can definitely be a huge help in some circumstances, but it’s not always good for everyone.

When Does a Refinance Make Sense?

Strictly speaking, anyone that wants to lower their monthly payment or shorten the mortgage’s duration should be interested in refinancing. But, there are a few situations where you don’t actually come out ahead financially. This is because of the hefty closing costs that accompany the process.

If you are actually interested in saving as much money as possible with the refinance, these questions should help.

  1. When do you break even? – How many years into the mortgage will it be until you effectively “break even” and have saved enough on interest to surpass what you spent on closing costs? For instance, breaking even after three years with fifteen left in the mortgage is a great deal.
  2. Will you have to move into an ARM? – It is almost never worth it to move from a fixed mortgage to an adjustable one through refinancing just to lower your rate. This is especially true now; rates are at all-time lows, so they will most likely go up in the coming years.
  3. Can you pay the costs out of pocket? – You have the option of rolling the closing costs into your new mortgage. But, this is an incredibly bad financial move, since you will be paying interest on that value for the mortgage’s lifetime. Always pay any costs out of pocket.
  4. Is a no cost refinance an option? – For those with a very high mortgage rate, lenders may be able to offer a “free” refinance, though it will not be at their best rate. This is definitely something to explore for those who cannot afford the costs of a conventional refinance.

Once you have the answers to these questions, it should be clear whether a refinance works for your unique situation.