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The Vanguard Group

Should you refinance your home?

Mortgage rates fluctuate. If today’s rates are significantly lower than the rate you’re now paying for a similar loan, refinancing to the new lower rate might save you a lot of money.

However, all told, refinancing can cost from $1,000 to $5,000, according to HSH, a leading publisher of mortgage and consumer-loan information.

You often have to pay for these services:

  • Survey.
  • Appraisal.
  • Title search.
  • Title insurance.
  • Realty transfer taxes.
  • Legal drafts and approvals.
  • Messenger or overnight delivery fees.
  • Document copying.
  • Recording fees.

You may also choose to pay points, which can be quite costly. A point represents 1% of the total loan amount (for example, one point on a $150,000 mortgage costs $1,500). Borrowers pay points to get a reduced interest rate on their new loan; however, you are not required to pay points.

When does it make sense to refinance?

The rule of thumb is to refinance when you can recover the cost of refinancing within 24 months. So be sure to stay put long enough to make the effort worthwhile. If you’re anticipating a move, refinancing generally doesn’t make sense.

For example: Betsy can save $250 a month by refinancing her loan. The mortgage broker has given her a fee sheet indicating the cost of refinancing would be $2,500. Betsy would recoup her costs in only 10 months. She should consider refinancing.

How can you find a good rate on a loan?

The Internet is a great way to follow interest rates. Good sources for current rates both nationally and in your area are:

These sites are also good sources for mortgage calculators that will help you calculate how much you might save, per month, by refinancing at a lower interest rate.

How much should you borrow?

Financial planners suggest that homeowners not pay more than 28% of their annual gross income on their mortgage payment. (The 28% should cover the principal and interest on the loan plus escrow payments for property taxes and homeowner’s insurance.)

Many people are tempted to take out a larger loan when they refinance. Sometimes that makes perfect sense. Other times they’re flirting with trouble.

Borrowing more might make sense if:

  • You roll the cost of refinancing into the new home mortgage. If refinancing makes sense economically, you’ll likely save money in the long run.
  • The extra funds go toward permanent improvements to your home, such as a deck. Just don’t go overboard. There is no assurance that you will recoup the entire cost when you sell your home.
  • You can eliminate a second mortgage or home equity line of credit with higher interest rates.

Borrowing more doesn’t make sense if you’re:

  • Paying more than 28% of your income in mortgage payments.
  • Consolidating unsecured debt such as credit-card charges. Changing unsecured debt to debt secured by your home or other collateral is not recommended. If you default on your mortgage, you can lose your home.
  • Using the money to buy depreciating assets, such as a car or rugs or curtains. If you roll those costs into a 15- or 30-year mortgage, you’d likely be paying for them long after their useful life has ended.
  • Paying for current expenses, such as a vacation or wedding.

Some people use home equity to pay for a child’s college education. While that’s a very generous impulse, there are many low-cost college loan programs for parents and children. Think carefully before you back this cost out of your home equity.

Fixed or adjustable rates?

Some adjustable loans come with a teaser rate that resets after a few years. Many homeowners have lost their homes by buying a home they could no longer afford once the mortgage reset at a higher rate.

That said, adjustable-rate mortgages have benefited people who bought during a time of declining interest rates. Their mortgage rate falls automatically without having to refinance.

Fixed-rate loans make sense for people who like the certainty of knowing exactly what they’ll pay each month no matter what. A fixed-rate mortgage is also a good choice when rates are at or near record lows. That way you can lock in a low rate for the life of your loan.

Learn more about mortgages.

Should your loan be for 30 or 15 years?

Do you want to pay off your loan as soon as possible? Or do you have some extra time? As you consider the length of your loan, think carefully about: 

  • The amount of your monthly payment.
  • The total interest you’ll pay.
  • Your age.

With a 30-year loan, for example, your monthly payments can be lower than with a 15-year loan, but you’ll likely pay much more in total interest. Conversely, you’d pay less interest with a 15-year loan, but you’d have a higher monthly payment to make.

Ask yourself how old you would be when the note is paid off.  If the answer is well into retirement, see if you can afford the monthly payment on a loan with a shorter term.

Otherwise, if you still have years to go on a large mortgage at age 65, you might need to downsize to retire.  

To see how you could shorten the life of your mortgage by prepaying principal, try our Mortgage Loan Calculator.

*Note: When you access any of the sites mentioned in this article, you will be leaving our site. Vanguard is not responsible for the accuracy of information on third-party sites. Vanguard receives no remuneration for website links in this article. This article is for educational purposes only.


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