How do I decide whether it makes sense to refinance?


Q:If I have a 30 yr loan, do I have to wait for rate to go down a full point before I refinance??

Q: How do I know that it is the right time to refinance, we have a 30yr fixed at 7.125%, good credit, and want to reduce the monthly payment. But we are concerned the closing costs and paperwork hassle will out-weigh the cost benefit??

Q:I want to buy a bigger house but I haven't found anything that meets my needs. With mortgage rates as low as they are, I could save money with a refinance but will that hurt me down the road on getting a mortgage??

A: The old rule of thumb states that you shouldn't refinance unless the rate has dropped by a certain percentage. That is not the best option, what a person wants to do is perform a breakeven analysis for figure out the cost benefit of a refinance.

The break-even point simply states is the amount of time it takes in monthly savings to recover the costs of performing the refinance. The way to calculate it is to divide the total fees by the monthly payment savings. For example, if you would save $200 month by doing a refinance and the total fees are $6000, then your break-even point is 30 months. Simply; $6000/200=30.

In the case above, if it is your plan to stay in the property for more than two-and-a-half years, you will definitely save money over time and it is a good time to refinance. BUT, if you plan to move before then, just stick with what you currently have.

How do you figure your monthly savings? VERY Easy, start by contacting one of edebtsolutions.org's preferred providers to get a quick rate quote to determine what you qualify for. They can tell you that and then you work with a mortgage calculator to figure out what your principal and interest would be with the new loan. Compare that to your current principal and interest payment and then it will become clear what your savings will be. You don't have to start over with a 30-year payment plan, by the way. Let's say you got a 30-year fixed mortgage four years ago, and you want to refinance now, and still pay-off the loan in 26 years. That's known as amortizing the loan over 26 years. Most mortgage calculators can help you figure out what your monthly payments would need to be.

If you refinance now, it won't hurt your chances of getting a mortgage a few months or years from now. Just be sure to verify that the new loan won't have a prepayment penalty. Make is clear to the loan officer that you must avoid prepayment penalties.

How do I know if it is too soon to refinance?

Q:I got a new house last year and the best interest rate I could get was 7 percent. Can I refinance now even thought it has been less than 1 year??

Q:We are on the 2nd year of a 30-year fixed mortgage of $475,000. Our rate is 6.5 percent and we plan to stay here until retirement. Should I refinance??

Q:I have owned my home for six months with a fixed rate of 6.75 percent. When should we think about refinancing? Will I be penalized by doing so within the first 12 months of home ownership??

A: It is completely acceptable to refinance a mortgage even if it is a brand-new one as it is simply a mathematical calculation to determine if it makes since. How do you do that? Just calculate the number of months it will take to break-even and then decide if it is right for you to proceed.

Because it is simply math, any additional fee's like a prepayment penalty just get factored into the equation. When banks calculate these fees, they make the penalty heavy enough to fail when factored into a break-even analysis. This is so they can make money on the higher interest rate loan. Most people just wait out the prepayment period and then refinance if it still makes since.

Mortgage and Credit Debt Services
Q What should I do if I am deep in debt?
A Whether it is caused by illness, the loss of your job, or simply just over-spending, a financial crisis of this sort can seem overwhelming, but it often can be overcome. Don't let your financial situation go from bad to worse.

Realistic budgeting, credit counseling from a good organization, debt consolidation, or bankruptcy, are some of your options. Knowing which one will work best for you depends on how high your debt is, if you can discipline yourself, and your prospects for the future.