Bad economic news in Europe is good news for American homeowners and homebuyers. Europeans, and other investors, are flocking to the safety of US securities causing the rates on mortgages to fall. Freddie Mac announced that mortgage rates have fallen to the lowest level of the year.
If you intend to stay in your home for less than a year it probably does not make sense to refinance. The old rule of thumb, that it does not pay to refinance unless you drop two percentage points, is worthless.
The correct way to analyze your mortgage is to compare the costs of refinancing against the pure interest rate savings. Eliminating mortgage insurance is an added bonus that should be included, if applicable. For example, if your pure interest rate savings and dropping the mortgage insurance saves $200 a month, and your total closing costs are $1,400, you would break even in seven months. Hard to find an investment in this day and age that will beat that!
Do not look solely at the change in the payment as that is deceptive. The reason is that you may be adding on to the life of loan. I have seen my clients refinance and the take the savings and apply that directly to principal. They have the flexibility of a lower payment, if needed, and the option of paying the mortgage off sooner and saving tens of thousands of dollars.
Remember that interest rates float down and spring up. You need to check sooner, rather than later, if you want to take advantage of this.
Next time: What is a zero cost loan?
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