Should I Refinance?

As mortgage interest rates have dropped over the past few weeks, I have received numerous emails from clients inquiring about the potential advantages of refinancing. Several of the clients referred to a 1% rule. They had read that a 1% spread between your current rate and the new rate is necessary for the refinance to be beneficial. I want to dispel that myth. The answer to “When should I refinance?” is that it depends.

 When analyzing whether a refinance would be helpful, we consider the difference in payment and closing costs. Since most of the closing costs on a refinance are fixed, the larger the loan amount, the less of a difference you need between your current rate and the refinance rate. Additionally, closing costs for a refinance vary significantly between DC, MD, and VA. DC has the lowest costs, VA has the highest, and MD is in the middle. So, a $1,000,000 mortgage in DC may only need a .75% difference in rate, but a $200,000 mortgage in VA might not make sense until rates have dropped at least 1.5%.

 We take the costs and divide by the savings. If the costs are recuperated in less than 24 months, then a refinance could be a great option to improve monthly cash flow. There are other factors to consider and options to explore, such as a shorter term and cash-out, but that will have to wait for another newsletter! Please contact me if you would like us to determine if a refinance is a good option for you.