Refinancing is a great way to save some extra money and to get greater financial flexibility. Typically, people refinance to make the most of lower interest rates, to replace an adjustable rate mortgage (ARM) with a fixed one, to remove FHA mortgage insurance and to meet the financial obligations that come with life-changing events like divorce.
However, refinancing is not for everyone, so you should know if this option is right for you and more importantly, when is this option right for you. There are many factors that you should consider while making a refinancing decision, and they are:
Understand the costs
Refinancing comes with closing fees, so you have to ensure that you really save a lot after the closing fees. For example, it makes no sense to refinance a $100,000 mortgage when the interest rate falls by one percent because it can take many years to recoup the fees paid towards refinancing. On the other hand, refinancing makes sense if you have a property worth $3 million as the one-percent saving can be substantial.
Length of stay
On an average, homeowners stay in a house for seven years. It makes sense to refinance if you plan to stay in that house for seven years or longer because during this time, you'll recoup the closing fees. On the other hand, if you plan to move out within two to three years, you'll not break even the closing costs.
To calculate the break-even point, use this formula:
Break-even point = Total closing costs / monthly savings
For example, if you have a $4,000 closing fee and your monthly savings is $100, then it's going to take 40 months for you to break-even. If you don't plan to stay so long in that house, refinancing can cause you to lose more money than what you saved, not to mention the time and effort spent on this process.
Term of refinance
Other than the interest rate, the term of mortgage should also be taken into consideration. The longer the term of the new mortgage, the more money you'll end up paying. For example, if a person refinanced her mortgage and had the choice to pay $700 for 30 years or $900 for 20 years, choosing the latter options is better. Hence, the period of new mortgage also has a bearing on how much you'll save eventually.
From the above three factors, we can deduce that the right time to refinance your mortgage is when you plan to stay longer than the break-even time, when you're refinance terms are shorter and when you have considerable savings over the closing costs of refinancing. If all these three aspects are met, then that's the right time to refinance your home.
These factors are more pertinent if you live in bigger cities like San Diego, as the cost of homes tend to be much higher than smaller cities. If you're unsure of the right time, it's best to contact refinance San Diego companies as they can give you the right information in this regard.
