August 4, 2008 • June Walbert
Q: When should I refinance a mortgage? My current rate is 6.374%. Should I wait until the rates lower to 0.5%? 1% 1.5%?
-Paul
A: You already have a decent interest rate, but thanks for looking at ways to save money! The rule of thumb to answer the question of when refinancing makes sense is if the new rate is a minimum of 1% lower and if you plan to remain in the house for at least a couple of years. Otherwise, it typically will not make sense. So, prior to refinancing you need to have answers regarding how much it’s going to cost, how long you’ll be in the house, and how much will you save on a monthly basis. Be advised that closing costs on a refinance can range from a few hundred to several thousand dollars. As you know, your lower rate will result in a reduced monthly payment. How long you will own the property is key because the longer you own it, the more likely you are to recoup costs and your savings from the refinance will add up. A simple calculation is to divide the closing costs (hopefully paid out of pocket!) by the monthly savings to determine your “breakeven” point (in number of months). Answer these questions and you’ll have the answer to yours!
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June Walbert is a CERTIFIED FINANCIAL PLANNER TM practitioner with USAA Financial Planning Services, one of the USAA family of companies.
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