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Should I Refinance My Home Today?
By EchoBay Loans Staff Writer

To refinance or not to refinance, that is a question that many homeowners ask themselves at least once during the course of their home ownership. "Should I refinance my Home?" "When is the right time?" "Is it worth it?" These are all questions that homeowners face when the topic of refinancing draws near. So how do you figure out if it's the right time for you to take the refinance plunge? There are some focused questions that you can ask yourself to help determine whether now is the right time to pursue better mortgage options, or if you're better off staying with the mortgage that you currently hold.

The first thing you need to do is take a look at the interest rates that are currently available.
If you're paying a lower interest rate now than you would if you were to refinance, you can probably forget about refinancing unless you desperately need a cash-out refinance for financial reasons or if you're facing the end of a balloon mortgage and there's no other way to satisfy the balloon payment. In most cases, if interest rates are up, you generally wait for them rates to drop below your current rate before you consider refinancing your home.

This, of course, brings into play the next question that you need to ask yourself. "How much of an interest-rate drop will make it worth my while to refinance my home?" The old, outdated rule of thumb is to wait until interest rates drop at least 2 percent before you refinance. However, this rule was definitely made to be broken. Sometimes a rate drop of half a percent will warrant good cause to refinance your home.

For example, let's say you took out a $150,000 30-year mortgage at a 7-percent interest rate when you purchased your home, and you've been paying on that mortgage for 1 year. Right now your monthly payments would stand at approximately $998. If you were to refinance the balance of your mortgage at a 6-percent interest rate over 30 years, your payments would drop to approximately $890, saving you over $100 each month. While that may not seem like a lot of money at first, over the life of the loan you could save over $38,000. Take that money and invest it instead of squandering it, and you could build yourself a pretty decent nest egg.

Of course, how much money you save will be determined by how long you plan on staying in your home. The longer you stay in your home, the more savings you'll enjoy. This is why it's important to estimate how long you plan on remaining in your current residence when determining whether or not refinancing is right for you. Refinancing has its associated costs, and if you plan on selling your property before you break even with those costs, the entire refinance process may be a fruitless venture.

So now you're faced with the question, "If I refinance my home, will I be able to break even on the costs of refinancing before I move?" This question is actually one of the easiest to answer. For instance, if you know that you'll be in your home for at least another five years, you can divide the costs of refinancing your home by the monthly savings you'll experience to see if it all adds up in the end.

Are you confused yet? At first the process of figuring the break-even points of refinancing can seem daunting. It's important to remember that it's simple arithmetic. Let's say it's going to cost you a total of $3,500 to refinance your home, and by refinancing you'll be saving $175 in interest each month. To figure out how long you need to stay in the home to break even, just divide $3,500 by $175. In this scenario, you would need to stay in your home for approximately 20 months before you would break even; so if you planned on staying for a few years, this refinance scenario would be a viable option for you.

In general, if interest rates drop one percent or more, and you plan on staying in your home at least up until your break-even point, it's a safe bet that refinancing would be a wise decision. And don't forget that if you've refinanced in the past, it does not mean that you can't refinance again. Some consumers take advantage of the savings opportunities each time interest rates take a significant drop, so there's nothing stopping you from taking advantage of multiple downward rate changes.


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