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When refinancing makes sense

To Refinance Or Not To Refinance? How Low Do Interest Rates Have to Go Before Refinancing Your Home Makes Sense by Wendy McPherson of Coldwell Banker If you currently carry a mortgage with an interest rate of 8.5% or higher, the Federal Reserve’s recent rate drops may “hit home” — offering many of you benefits that directly impact your wallet. Considering refinancing, but not sure if it is the right option, right now? Here is my recommendation of when it makes sense for you. Like gasoline, food, and medicine, money is a commodity – which means, like all commodities, money has a price. The price of the money you borrowed to buy your home is the interest you pay through installments every month. What does the recent decline in interest rates mean to you — assuming you already have a mortgage and are already making monthly payments on your home? It means refinancing is an option that may allow you to reduce your monthly mortgage payments. With a mortgage refinance, you are actually re-paying your existing home loan and borrowing new money to pay for your house at a lower-price. If refinancing your existing mortgage sounds like a great concept, it is, but it is not for everyone. Because refinancing involves closing costs, which are additional costs associated with processing a new loan, it only makes sense to pursue this route if you refinance for an interest rate that is at least 1.5% lower than the current interest rate of your loan and only if you are planning to stay in your home for a minimum of three or more years. How can a homeowner determine if refinancing produces a justifiable savings? Let’s assume you hold a 30-year, $400,000 mortgage with an interest rate of 8.75 percent. You are currently paying $3,146 in monthly principal and interest. Based on an interest rate of 7.25 percent, refinancing a $400,000 loan would result in a reduced monthly payment of $2,728, or a monthly savings of $418. Now let’s assume the closing costs to secure the new loan are $3,500. Is it worth refinancing? Yes, because the monthly savings of $418 amounts to $15,048 in savings over three-years, which exceeds the $3,500 in up-front closing costs. In fact, this refinancing pays for itself in just nine months! Over the life of a thirty-year loan, this refinance will save a whopping $150,480. Obviously, in this case, it would make sense to refinance. To apply this example to your specific mortgage values and see if it makes sense for you, visit the mortgage center at www.coldwellbanker.com. Or, for more specific questions contact my office today. The above tips are provided by Wendy McPherson, Manager of Coldwell Banker Northern California’s Menlo Park – El Camino office. As a real estate veteran, Wendy oversees a talented team of over 40 real estate professionals in the Menlo Park area. Her office is located at 1295 El Camino Real and can be reached at 650.323.3400. Wendy can be reached by e-mail at wmcpherson@cbnorcal.com

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