Historically low interest rates have caused many in our area to question: Should I refinance my Long Island home?
Refinancing your home mortgage can seem like a no-brainer. The ideas of lowering your interest rate, renegotiating your terms to reflect an improved interest rate or to shorten the lifespan of your loan are terrific options. Yet to refinance is a decision that requires careful thought and consideration.
It comes down to a simple calculation: How much the lower rate would save you on a monthly basis compared to the cost of refinancing?
Let’s do some calculating.
If closing came to $6,000 in fees and the new lower rate saved you $50 a month, it would take 120 months (ten years) to break even.
In most cases, that would be too long. Even if you stayed in the home for 12 years, that $6,000 in fees would be too much invested just to save $1,200 (Ten years to break even, then two years of saving $50 a month).
There's an old standard that says you need a rate two percent lower than your current rate to make refinancing worth it.
But this is wrong. The way we calculate it, in most cases (not all), anything over .75% in a lower rate mathematically makes sense to refinance.
Of course, part of the calculation has to do with how long you plan on staying in that house. The shorter the time, the less likely it would be worth it to refinance.
People also refinance to consolidate debt. Let’s consider if you have gotten into credit card trouble with two credit cards with a combined $50,000 in debt. You would be able to save money with a "cash out" refinance and use that money to pay off the credit cards at 18% interest for a mortgage at a four percent rate. In addition, you would receive tax deductibility on the credit card balances that you’d rolled into their mortgage (which you weren't getting from when the balances were on the credit cards).
People also complete a "cash out" refinance to take out some of the equity to buy out an ex-spouse and to take his or her name off the property.
Another thing worth consideration whether there is enough equity in the house to refinance and if you, as a homeowner, can show the income needed to qualify. It's possible that you might have gotten your mortgage before the meltdown in '08. As such, when you were approved, no paystubs or bank statements were required. But now the guidelines have changed so much that there's little chance someone would be able to qualify without being able to show show paystubs and W-2s.
Is refinancing a viable option for you? Call a professional home mortgage consultant at Contour Mortgage to find out of this decision is right for you.
