Making Sense of Refinance

This week we answer the following blogger question:

Q: Interest rates have gone down since I purchased my home in Truro a few years ago. How will I know when it makes sense to refinance?

A: Homeowners refinance for many reasons. Common reasons include: the desire to opt out of an adjustable to a fixed rate loan, the need to use the equity in your house for another expense (like a remodel or a child’s tuition), or simply to save money on your monthly payment. 

The formula to figure out whether a refinance will be favorable for you is quite simple. First, you need to figure out how long you plan to be in the house. Take the amount of your monthly savings with the new loan, and multiply it by the number of months you plan to be in the house. Compare this number to the fees that you will be charged for the refinance. If the fees are higher than the savings, then it may not be worthwhile to refinance at this time. Many people never get past the illusion that a lower monthly payment can create. Remember, you must consider the long-term equation.

It is always a good idea to consult an expert. Speak with your mortgage broker and ask him/her to lay out the comparison for you. If you don’t have a trusted broker, ask a friend or your real estate professional.

Keep in mind that it may be difficult to refinance in today’s market due to the difficulty of obtaining accurate comparable sold properties. Appraisers are hard pressed to provide banks with current sales due to the slow down in the market. This could impede your refinance efforts.