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Does Refinancing Make Sense for Crofton Area Homeowners?

Low rates continued to fuel the re-finance market last week as both 15 and 30 year mortgages fell below 5%. (Source:  Mortgage Bankers Association)

Refinance chartWhat would that mean to you in real dollars, if you refinance?  Take a look at this chart I created (on the right).

Once you calculate the monthly savings you would enjoy by refinancing, you should consider the costs of refinancing such as appraisal (up to $400), government fees (depending on the county), points and/or loan fees (depending on the lender and type of loan).  Divide that cost by the monthly savings amount to determine how many months or years it would take to break even.  Chances are fair that you’ll have to live in your home quite a while to come out ahead if your interest rate is in the 6–6.5% range.  If, on the other hand, your rate is 7% or higher, your decision will be easier because the savings will be greater.

In my case, it doesn’t make sense to refinance at a lower rate because refinancing for 30 years would add about 12 years to paying off my loan, and 12 extra years of payments would more than eat up the monthly savings I would enjoy in the short term.  Refinancing for a shorter term, such as 20 years, would not reduce my monthly payment even at a lower rate.  Many of my Crofton area neighbors are probably in a similar position.

Another factor that may affect your refinance decision besides interest rates is whether your home will appraise for enough to refinance.  Chances are the answer is “No” if you purchased or did a cash-out re-finance in the past three or four years.  That’s because you may owe more than the property is worth in today’s depressed housing market.  In that case, I recommend you just ride the market, because housing values will eventually come back.

If your current loan is VA or FHA, the appraisal may not be a factor since they offer “streamline” refinancing that does not require an appraisal, credit report and much of the documentation required for other types.

How do you find out the costs associated with refinancing?  My suggestion would be to check with your current lender and at least one other resource – perhaps your credit union or a lender recommended by me or your previous REALTOR.  In the meantime, here are some links that you may find helpful as you consider whether or not to refinance:

Coming Monday, March 23:  Spotlight on Crofton First

 

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 Copyright 2009.  All rights reserved.  “Does Refinancing Make Sense for Crofton Area Homeowners?”  – Margaret Woda

 

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