Refinancing is an option that is highly dependent on your specific situation, but with rates at all time lows there are a number of factors to consider when deciding if a refinance is right for you.
Starting Situation: I had purchased a home in Massachusetts using my VA Loan for $325, 000 in 2008 at 6% interest rate with my total monthly payment including: principle, interest, taxes and insurance approximately $2,500.
Change in my Situation: My job required me to relocate to be close to New York City in 2009. Luckily I was able to get my place rented covering my total payment amount.
Motivation to Act: In 2010 the interest rates started declining. In November 2011 when rates were hovering around 4%, I decided to refinance, locking in a rate of 4% doing a VA Interest Rate Reduction Refinance Loan (IRRL).
Result of my Refinance: My cumulative closing costs and fees were around $4000 and my new payment was just under $2000… therefore I was able to reduce my total payment by $500 a month. I was able to re-coop the $4000 that it cost me after 8 months. After those 8 months I’m able to save $500 a month straight to my bottom line.
Math Breakdown
2008 Total Monthly Payment: $2,500
2011 Total Monthly Payment: $2,000
2011 Costs Savings per Month: $500
2011 Refinance Cost: $4,000
Months to Re-Coop Closing Costs: $4,000/$500=8 Months
Refinance Month: November 2011
Break even month: July 2012
Starting in August of this year I will have paid off my closing costs and fees, and will retain $500 a month in true savings that I never had before!
Should you Refinance?
How long to you plan on owning the property?
- If you are thinking of refinancing, then you should be planning on living in your home long enough to recoup the cost and fees of doing your refinance.
- The best way to do this is to get a good faith estimate or consultation, which can be done at no cost to you.
What’s your current rate?
Many experts say that a good threshold for looking at whether you should refinance or not is if you can get your rate down by a percentage point.
Do you need cash?
Everyone encounters periods where they need extra money for reasons like college, remodeling, moving or to lower your payment to fit the rental market.
- If for example your student loans are at 6%, you would have the option to take money out of your equity at a lower rate to pay off higher paying interest debt.
- Or, if you have credit card debt that you can’t seem to get rid of – and paying a high interest rate – then taking cash out of your equity at a low interest rate would make sense to pay off very high interest rate debt, such as credit cards.