MythTip: When to Refinance

With interest rates at all-time record lows, refinancing is becoming quite a popular past time. The trouble is, refinancing costs money, and it can be hard to tell when it is a good time to refinance your mortgage. Here are a few tips to consider when thinking about refinancing:

  1. How do the rates compare? This is the most straightforward and obvious question to ask. The benefit of reducing your interest rate by 4% is obviously greater than the benefit of reducing your rate by only 1%.
  2. Don’t stress about waiting for “the bottom” to hit. This one is important for one very simple reason: no one knows when interest rates will bottom out. If it makes sense to refinance now, then do so. If rates drop more in the near future, it’s okay because you have already cashed in on a great deal. If you wait until you are sure that rates have bottomed out, then you are likely to miss out on the low interest rates altogether. Take the deal when it’s available. You’ll sleep better, and you’ll be certain that you’ve made a good decision.
  3. Consider how long you plan on remaining in this home. The time you remain in your home is very important to all mortgage-related questions, and the question of when to refinance is not exempt. The reason this question is important is because it determines how much you will benefit from the decreased interest rate. If you can save $100 per payment, but only make 3 more payments, was it worth paying $5,000 for the refinance? Obviously not.
  4. Get a calculator. If you’ve followed the blog for any amount of time, you have seen me do a number of calculations that may seem almost magical in their ambiguity. Trust me, no one has seen this more than I have. The truth is, in finance, the interrelations of all the factors that contribute to the final solution are anything but straightforward. There are certain trends, true, but because of the nature of the equations involved, the relationships are anything but one-to-one. So, get a calculator to help you decide when to refinance. It just so happens that I have one right on this very site that you can use. The actual functions of this calculator are complex, and delve deep into the more difficult concepts in finance, so I won’t go into detail as to how it works. Suffice it to say, it works, and you can use it to help you get an idea of whether or not you should consider refinancing. So go ahead, try it out.

Posted on 4 Mar 2009