When to Refinance Your Home
In a financial market of competing rates between banks, there are often opportunities for home-owners to “take advantage” of current specials or drops in interest. When is it a good idea to refinance your home?
Refinancing is, to many, the silver bullet to debt, or the answer to their future vacation plans. To others, refinancing is just a sensible and logical way to get ahead in the money game.
One simple rule to whether you should refinance is if you will save enough money in interest to pay for the closing costs of the new loan.
For example, if your home loan is $100,000 and your new interest rate is 1% point lower, you will effectively save $1000 each year. If your closing costs are $3000, it would take 3 years to make your refinacing costs back. This is simply a break-even situation, and not really worth it, unless you plan to keep your home for the life of the loan.
A 2% savings, however, would pay the same costs back in half the time. So, don’t consider refinancing unless you know you can save at least 2% over your existing rate.