Refinancing Your Home-Is Now a Good Time?
If you have a loan that is two years old, chances are that it might be an adjustable or could be at a higher interest rate than you can get now. A good rule of thumb, when it comes to refinancing is whether you can get a loan that is two percentage points lower or not. You have to consider what the closing costs are going to be and in some cases, these can amount to a few thousand dollars. One thing that has become a major factor is the appraisal, because property values have declined, so you might have to come up with a higher down payment, just to save on your monthly payment.
Another thing to consider is how long you plan to keep your home. Lowering your monthly payment now might seem attractive, but if you think you will move in a couple years, then it might not make sense. The reason for this is that a new loan starts out paying interest first and principal balance later. You might not have any noticeable principal balance paydown by the time you are ready to sell. You can always hope that values go up, but they might not.
The better question would be whether you absolutely need the lower payment, don't plan to move within the next couple years and have enough equity that you won't have to take money out of savings to pay down the principal balance. If you have to come up with additional down payment, then you might be better off to put it towards your present principal balance, which would accelerate the paydown of your current loan and you would get equity much quicker, if you plan to stay there for a while longer.
You also have to consider whether a new loan would have a pre-payment penalty, because this can amount to a few percentage points, if you sell the home and payoff the lender before the pre-payment period is over. When you are considering re-financing, you have to consider your equity, how long you plan to live in the home, the appraised value, and whether there is a pre-payment penalty.
It used to be that the only rule was more than two percentage points and staying in the home five years were the guidelines. Now, you have to consider the amount of closing costs, pre-payment penalty, equity position and the fact that you will have little principal paydown in the first part of the loan life. If you plan to hold onto the home for a few years, have sufficient equity in the home and have found a more attractive loan with low closing costs, no pre-payment clause and a monthly interest savings of more than two percent, you might be better off re-financing for a lower monthly payment.
Since each situation is different, the old rules no longer apply, in most cases. Now, the experts are saying that the interest difference might need to be three percent or more, depending on the price of your home. The higher priced the home is, the lesser the interest percent difference needs to be to make a difference in monthly payment. You just have to consider your long term goals, when it comes to re-financing.
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