Finance

You Should Refinance If…

With interest rates near all-time lows, many people would benefit by refinancing their mortgage. While many people could benefit from receiving a lower interest rate, many are swayed away from a mortgage refinance due to the lengthy and tedious process as well as the costs associated with refinancing. While many people try to avoid refinancing, there are various situations where you absolutely should refinance your mortgage.

The first situation when you should refinance your mortgage is if you could save money on your monthly payment. With the average 30-year mortgage rate around 5.10%, millions of people across the country could save considerably by refinancing their mortgage. Just a few years ago, the average 30-year mortgage rate was over 6.50%. If a person with a 30-year, $300,000 mortgage was able to reduce their interest rate from 6.25% down to 5.10%, their monthly payment would reduce from $1,264 down to $1,085, a savings of $179 per month. This would save over $64,000 in interest charges over the course of a 30-year mortgage.

Another situation when you should refinance your mortgage is if you plan on staying in your home for a long period of time. Due to the high rate of foreclosure and mortgage defaults, many mortgage lenders are forced to charge high origination fees to compensate for their risk. These fees often cost up to 2% of the principal borrowed. For example, a $200,000 mortgage refinance will often come with fees of around $4,000. Using the example from above, the borrower would not break even on the transaction for 22 months ($4,000 / $179 = 22.34 months) if they were to refinance. Therefore, if the borrower thinks that they will stay in their home for more than 22 months, then they should refinance their mortgage.