Refinancing your home is often a good financial decision. Here are my answers to some common questions that homeowners ask me about refinancing, including when to refinance, whether or not to buy down the rate with discount points, and interest rate lock-in periods.
When should I refinance my home?
It would be wonderful if I could just tell you, or if there was a simple formula that would determine when refinancing is warranted. The truth is, there are many variables (different for each homeowner) that should be considered before making a final decision, and it’s always best to consult a loan officer who understands both the advantages AND the hidden pitfalls of refinancing.
That being said, you should always consider the following:
1.The total cost of the refinance. (Can you afford it?)
2.The length of time the new loan will be kept. (Do the savings over time offset the cost of the refinance?)
3.The impact of a new loan on the salability of the home. (Low-rate assumable loans can be highly beneficial in the marketing of a home.)
4.The stability of the new loan compared to the old loan. (Refinancing an adjustable rate loan into a fixed-rate loan is often a wise choice.)
Another particular caution is the “two percent†myth. The industry is riddled with the mistaken belief that refinancing is worthwhile only if your new rate is two percent lower than your current rate. That’s like saying you shouldn’t buy a new house unless it’s at least 20% larger than your current house!
In some cases refinancing may be worthwhile for a very small drop in rate; in other cases refinancing may not be worthwhile even with a huge reduction in rate.
Should I pay discount points to “buy down†the rate?
Buying down the rate refers to the payment of discount points in exchange for a lower interest rate. A discount point costs one percent of the total loan amount. Hence paying two discount points on a $100,000 loan requires $2,000. There are both simple and complex methods of determining whether to buy down the rate.
The simple approach requires a basic mathematical calculation.
First, take a look at your payment options with and without points. For a $100,000 loan, if your alternatives are a 6.25% rate at zero points or a 6.00% rate at one point, you’re effectively choosing between two monthly payments: $615.72 or $599.55.
Then divide the cost of the point ($1000 in this scenario) by the amount you’ll save per month due to the lower interest rate ($16.17) and you’ll see that it will take you just over 5 years to make up for paying the point ($1,000/16.17 = 61 months).
If you’ll be keeping the loan longer than the number of months indicated, then the payment of the discount points is mathematically warranted.
How long do I have to lock in an interest rate?
That depends on the loan product and the lender. Some interest rate lock-in periods are as short as seven days, but most reputable lenders provide for a range from seven to at least 60 days.
Extended rate-locks are sometimes available with lock-in periods as long as 270 days, but these extended locks may require extra discount points or a slightly higher interest rate. Keep in mind, talking with a loan officer experienced in refinances can be invaluable in your decision process.
If you’re located in Central Oregon near the Bend area, feel free to contact me with your specific questions about refinancing.
David Winfrey is a Home Loan Consultant and Mortgage Planner for Countrywide Home Loans, as well as a frequent contributing writer for OHM. Feel free to contact him with any questions you may have about home mortgages and financing.