Thursday, January 1, 2009

When Is It Time To Refinance An Existing Fixed Rate Mortgage for a Lower Fixed Interest Rate? (Part 4 of 6)

This is the type of transaction where the rules of thumb are most likely to come in to play. A homeowner or investor is strictly looking to reduce their existing interest rate and/or payoff their mortgage faster. And here is where many people are told they need to save at least 1% on the interest rate to make refinancing worthwhile.

But again, there are variables that need to be considered:
  • What are the closing costs associated with the transaction?
  • When is your “breakeven point” when the interest savings will have covered the costs associated with the transaction?
  • How long do you plan to keep the home/property?
  • How far are you in to the repayment of your existing mortgage(s)?

I’ve spoken with many people who are “waiting out the real estate market”, waiting for when this current cycle turns and their property values increase. We can only give this our best guess on how long this will take, but a guess needs to be made to try to make sure the costs will be recovered within and the benefit of the lower interest rates seen during that period of time. Some people have no intention of ever selling their home, and having a longer period to hit the “breakeven point” would be okay. Others have had their existing mortgage for many years, and a lot more of their payment is going toward reducing their principal than paying interest, so how much interest remains to be paid based on their amortization schedule comes in to play. Still others experience such a dramatic improvement in their existing rate that the costs are offset very quickly.

This is where it is critical that you: a) talk to your financial planner/tax advisor and b) go to someone you know and trust to talk about your financing, someone whose goal is to help you meet your goals and objective, not just make a profit from you.

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –

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