When Should You Refinance?

How to know when it�s time to apply for new mortgage terms

Thinking of Refinancing? Not So Fast …

In these situations think twice before refinancing:

The savings don’t  outweigh the costs.
Take closing costs into consideration when deciding whether or not to refinance. Costs associated with closing can be anywhere from 3% to 6% of your outstanding principal depending on the state you live in and which lender you choose.

You’ve consolidated debt more than once.
“Refinancing should not be used as a regular practice for reducing debt,” says Alexandria R. Cummings, a Chicago-based senior financial adviser with Polaris Wealth Management. Instead, adjust your budget so you can live within your means.

You’re planning to move in a couple of years.
“The shorter the length of time that you plan to keep the mortgage, the less sense it makes to refinance because unless you pay the closing costs out-of-pocket you’ll be pulling equity out of the house,” advises Kirk Charles, author and blogger at BlackEnterprise.com. When your motivation for refinancing is to lower your interest rate, you’ll realize the greatest savings over time.

The interest rate is still too high.
The rule of thumb for considering a refinance is to wait until interest rates are two percentage points lower than the one you currently have, Cummings says. Otherwise, the closing costs might cancel out any savings in interest you would have gained. To estimate your savings use a refinance calculator such as the one at Calculators4Mortgages.com.

You’ll incur a prepayment penalty.
Some mortgage contracts specify that a penalty will be charged if the loan is paid off early. Add this cost to other closing fees to see if you would still save money over time. But first ask the lender to waive or reduce the fee. There are no guarantees, but as Marc Savitt, former president of the National Association of Mortgage Brokers observes, “everything’s subject to negotiation.”

This article originally appeared in the February 2010 issue of Black Enterprise magazine.

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