Is Refinancing the best option for you?

While it’s true that refinancing has the potential to improve your overall financial picture, it is not necessarily a strategy that makes sense for every individual in every situation. So before you make a commitment to refinance your mortgage, it’s important to determine whether such a move is the right one for you. The most popular reasons for refinancing include:

• Locking in a fixed rate
• Lower mortgage payment
• Consolidate high-interest debt
• Access home equity for your special needs such as home improvements

Adjustable Rate Mortgages (ARM) & Inflation:

Many prominent economists believe that there is a substantial risk of significant monetary inflation over the next several years. This inflation will result in much higher interest rates. The last time we experienced significant inflation was in the 1970s when rates were well into double digits. This is why it is risky to maintain an ARM. Even though your payment or rate may be low today, it will very likely spike up markedly if inflation arises. By then, it will be too late to refinance. Locking in a very low fixed rate today while rates are near historic lows is highly recommended.

Break Even Analysis:

If you are concerned about the cost of refinancing, the experts at JVM will happily help with your “break even analysis”. A simple break even analysis is done as follows. You subtract your new payment from your old payment to calculate your monthly savings. You then divide your total estimated closing costs by your monthly savings. The rule of thumb is that your savings should cover your closing costs in 24-36 months. Some borrowers, however, opt for much longer break even horizons if they know they will stay in their house for over ten years and they do not think they will ever refinance again.

For example, reducing your rate one percent from 6.5% to 5.5% for a $100,000 loan saves you about $64 per month. This same rate reduction for a $300,000 loan would save you three times that amount, or $192 per month. If refinancing a $300,000 loan requires $3,000 in closing costs, the break even point would be just under 16 months.