How Low Do Interest Rates Have to Go Before Refinancing Your Home Makes Sense

If you currently carry a mortgage with an interest rate of 8.5 or higher, the Federal Reserve's recent rate drops may "hit home" — offering many of you benefits that directly impact your wallet. Considering refinancing, but not sure if it is the right option, right now? Here's how the experts at Coldwell Banker Real Estate Corporation (Coldwell Banker^®) determine if and when it makes sense for you.

Like gasoline, food, and medicine, money is a commodity. Which means, like all commodities, money has a price. The price of the money you borrowed to buy your home is the interest you pay through installments every month. Because interest rates are inherently tied to fluctuations in the economy, you would assume when news outlets report declining interest rates, the value of money is also declining. What does this mean to you — assuming you already have a mortgage and are already making monthly payments on your home? It means refinancing is an option that may allow you to reduce your monthly mortgage payments. With a mortgage refinance, you are actually re-paying your existing home loan and borrowing new money to pay for your house at a lower-price.

If refinancing your existing mortgage sounds like a great concept, it is, but it is not for everyone. According to Bob Andwood, vice president of Sales and Account Management at Coldwell Banker Mortgage, "because refinancing involves closing costs, which are additional costs associated with processing a new loan, it only makes sense to pursue this route if you refinance for an interest rate that is at least 1.5% lower than the current interest rate of your loan…and only if you are planning to stay in your home for a minimum of three or more years."

How can a homeowner determine if refinancing produces a justifiable savings? Let's assume a homeowner holds a $140,000 mortgage with an interest rate of 8.75 percent. He is currently paying $1,101 in monthly principal and interest. Based on an interest rate of 7.25 percent, refinancing a $140,000 loan would result in a reduced monthly payment of $955, or a monthly savings of $146. Now lets assume the closing costs to secure the new loan are $3,500. Is it worth refinancing? Yes, because the monthly savings of $146 totals $5,256 over three-years, which exceeds the $3,500 in up-front closing costs. Over the life of a thirty-year loan, this refinance will save a whopping $52,560.

Obviously, in this case, it would make sense to refinance. To apply this example to your specific mortgage values and see if it makes sense for you, visit the mortgage calculator linked from this site, for more specific questions, contact Coldwell Banker Crossroads Real Estate.


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