This morning I received an email from a client asking my opinion on whether he should refinance his house that he bought 5 years ago. I thought this was a great question that other people might be thinking about as well, so here’s my opinion:
1) Can you get a rate at least 1 percent lower than what you’re paying now? If not, it normally doesn’t make sense because of closings costs and adding years back to your mortgage which I’ll talk about in the next two points.
2) How much in closing costs will you have to pay? You need to determine how long will it take you to break even and save enough each month to make those closing costs worthwhile.
3) How many years will you end up adding back to your mortgage? You’ve already paid 5 years on your mortgage. If you refinance and go back to a 30 year loan, you will basically be paying those 5 years all over again. Many people don’t take this into consideration. They only look at the fact that they’re saving some money each month.
This refinancing calculator from BankRate.com can help you determine if it makes sense financially.
4) Do you need or want any extra cash now? I’m hoping the answer to this is no because this is one of the reasons why so many people right now (December 2008)
owe more on their homes that what their houses are currently worth. While the market was hot, many people looked at their homes as a piggy bank and took extra money out when they refinanced. If you’re going to take some extra money and then put the money into the house, that can make sense, but otherwise it’s normally not a smart financial move.