Is it time to refinance? Many of our first time home buyers that have purchased in the last couple years have been asking us if they should refinance in order to lower their interest rate. But lowering your interest rate is only one of the factors to consider.
What other factors are there? Another factor for our first time home buyers to consider is the COST to refinance. If you can lower your interest rate by .25% which in turn reduces your monthly payment by $50, but it would cost you $4000 in fees and you’re only planning on living in the home for another 3 years it probably wouldn’t make sense due to the break-even timeframe.
What’s a break-even timeframe? In the previous example you’d be saving $50/mo or $600/yr, but you’re upfront cost would be $4000. So for you to recoup your upfront expense you would have to live in the home for almost 7 more years! ($4000/$600=6.67yrs) Obviously the more you can reduce your interest rate, the shorter the break-even timeframe will become.
Then I definitely wouldn’t refinance! Wait. Yup, you guessed it, there’s still another factor to consider. Many of our first time home buyers only put the minimum 3.5-5% down when they purchased their first home. This subjected them to mortgage insurance, which can add as much as a few hundred dollars to your monthly payment. Because of the incredible amount of appreciation we’ve had recently, a new appraisal of your property could find that you’ve had enough increase in home value to completely DROP your mortgage insurance drastically lowering your payment!
Don’t make the biggest financial decision of your life without getting educated! As you can see there are many different factors that go into calculating a monthly mortgage payment as well as considering a refinance. If you would like to find out more about mortgage costs or the home buying process in general, please go to our Calendar/Reservations page to register for one of our FREE First Time Home Buyer workshops.