To Refi or Not to Refi

If you have purchased a house within the last two years it might be time to think about refinancing. Interest rates have dropped as much as 1% over this time least year which can add up to significant savings long term. But how do you know if it is the right time for you to refinance? It will primarily depend on your future plans with your property. There will be closing costs associated with refinancing (as a general estimate expect about 3% of the amount of the loan) and if you know you will be moving within the next couple of years, there might not be enough time to recoup all those fees.

nerdwallet.com has a fantastic calculator that shows your break even period (the number of years you’ll have to make the new monthly payment before you recoup the costs of refinancing) and also calculates your(potential) savings comparing your current mortgage with your ‘new’ mortgage terms. And while it may not be possible for all homeowners, refinancing a higher rate 30 year mortgage to a lower rate 15 year can save you thousands.

For example, a $175,000 loan balance on a 30 year mortgage at 4.875% refinanced to a 15 year at 3.25% will add about $275 to your monthly payment, BUT by year 5 it will have saved you $11,000 and by year 10 you will have saved $31,000 and by the 15th year you will own the home free and clear.

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