Daily there is news that mortgage rates are the lowest they have been in years. Everywhere there are promises of lower payments and low cost refinancing. But is it always wise to refinance into a lower rate? Is 2% lower rate still the rule of thumb? There are other considerations.
Calculate Mortgage Refinance Breakeven Point
Refinancing a mortgage isn't cheap and your credit will need to be reviewed by the lender. Costs will include appraisal, title search and insurance, points, lender fees, recording fees, etc. and if taxes and insurance will be paid through an escrow account, funds will be collected to fund that account (prepaids) as well. So, first of all, a homeowner needs to ask themselves if they'll be in the home long enough to recoup those costs. To determine the breakeven point, closing costs (not prepaids) is divided by the monthly savings amount. If plans are to stay in the home longer than the result of that calculation, refinancing may be a good idea.
What is the Refinanced Amount in Relation to the Home's Value? (LTV)
Everyone is painfully aware that in most areas of the country right now, homes have dropped in value. To add insult to injury, many of the mortgages on those homes were provided at a high LTV. Often, if a borrower's credit was strong enough, they obtained a mortgage for 100% of the purchase price (100% LTV).
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