| |
With mortgage rates near historic lows, homeowners may have the option of refinancing. If you can lower your monthly payment by a significant margin and you plan to stay in your home long enough to recoup the cost of refinancing, you may want to investigate this option.
To Refinance or Not
Consider this example: If you had a $200,000, 30-year mortgage with a 7% interest rate, your monthly payment would be $1,331. If you refinanced at 5%, your new monthly payment would be $1,074, a savings of $257 a month. Assuming your new closing costs amount to $2,000, it would take eight months to break even. ($257 x 8 = $2,056)1
In this example, if you planned to stay in your home for at least eight more months, then refinancing may be appropriate under these conditions. If you planned to sell the house before then, you might not want to bother.
All Mortgages Are Not Created Equal
In addition to the annual percentage rate (APR), when considering whether to refinance, there are other important variables.
- The term of the mortgage -- Shorter terms can result in significantly reduced interest costs over time. On the other hand, they may require higher monthly payments.
- The variability of the interest rate -- An adjustable rate may be lower initially when compared with a fixed rate, but adjustable rates are likely to move upward over time. With a fixed rate, there is greater certainty regarding your monthly payment over the life of the mortgage.
- Points -- Also known as origination fees, points are paid to a lender or mortgage broker at closing. One point usually equals one percent of the loan's value.
- Other mortgage-related fees -- You may also pay a mortgage broker fee (if you do not go directly to a bank or other lender), a title insurance premium, a commitment fee, attorney or settlement fees, an appraisal fee, and other costs that add up quickly.
The amount of money you may save and how long you plan to live in your home are key variables that influence whether you should refinance your mortgage.
1 Months to break even rounded up to the next highest month. This example is for hypothetical purposes only and does not consider the impact of taxes.
© 2010 Standard & Poor's Financial Communications. All rights reserved.
©2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions
|
