Refinancing Rules of Thumbs

I toyed with the idea of using the title, “If You Don’t Refinance with These Ridiculously Low Interest Rates, well, I Don’t Know How to Help You.” But then that just makes my title wrap around and nobody can read it anyway.

In all seriousness, the same details and research apply to your refinancing as did to your first mortgage. And to help with that, the Motley Fool came up with a few questions to ask before you rush out to the bank for a refi.

Do you expect to be staying put in your home for at least a few years? If there’s a good chance you’ll be moving next year, you may want to skip the refinancing. That’s because refinancing costs money. Closing costs typically total 2% to 3% of the loan. If it costs you $3,600 to refinance, and you’re saving $100 per month, then it’ll take you three years to recoup your closing costs by refinancing.

I remember refinancing years ago (when interest rates were in the mid 5% range). The mortgage broker asked me how long I plan to stay in the house. At the time, my answer was indefinite. Less than 18 months later, we sold the house and moved. I wish I had know there was a chance I was going to move so soon afterwards.

Is there a prepayment penalty in effect in your current mortgage? Some loans have such penalties for the first few years of a loan. If so, refinancing may not be worth it. Look into your current loan terms, and if you do end up securing a new loan, make sure it lacks prepayment penalties.

I was at least smart enough to ask this question both times I got a mortgage (and the one refi). I’ve never heard of banks charging a prepayment penalty. If your’s does, please comment.

How much equity do you have in your home? Many homes have fallen in value significantly, with the median national price of a single-family home still down almost 20% since 2007.

I borrowed heavily from our home’s equity to finance a few business ventures (unwise business ventures). I still technically have 20%+ equity in my home. But it’s collateral for my home equity line of credit (HELOC). So, I’m assuming it would have to be factored in. What bank would want to refinance a loan with equity that’s tied up in another loan?

I imagine in today’s economic climate, the amount of equity in your home may be the deciding factor in whether nor not you get a loan.

Do you have an adjustable-rate mortgage (ARM)? If so, refinancing into a fixed-rate loan now, at these historically low rates, can be a smart move.

I think refinancing to a low, fixed rate loan is your best bet if you plan on sticking around for a few more years (see the first rule above) if you currently have an adjustable loan. Rates won’t be this low forever.

Read more refinancing tips from the Motley Fool at Yahoo News.

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