Should I Refinance my VA Loan?
Are rates low? Relatively speaking, are they lower than your current rate? Should you refinance now? Isn’t everybody?
It seems every week we hear about interest rates “hitting record levels” or the Fed is implementing its Quantitative Easing strategy to help spur growth. And you can’t ignore the barrage of commercials encouraging everyone this side of the hemisphere to refinance their mortgage loan. Maybe you already refinanced a couple of years ago and rates have dropped further still.
How do you know it’s a good time to refinance? The answer is you don’t need to be talked into a refinance; the numbers should work for themselves. But first, don’t pay attention to the rate. Okay, it’s lower, but how much lower does the rate need to be before a refinance will be a benefit?
Some will tell you that it’s not worth refinancing until rates drop two percent below your current rate. Or wait, maybe it’s one percent. Which is it? Actually it’s neither. The key to determining if a refinance is a smart move is calculating the difference in monthly payment a refinance would provide. Divide that difference into the closing costs you incurred during the refinance and the result is how many months it will take to “recover” those closing fees.
For example, you have a $200,000 30 year mortgage at 5.00 percent and rates today are 3.50 percent. Your current monthly payment is $1,073. A 3.50 percent rate would give you a new payment of $898, for a difference of $175 per month. Not bad. But good enough?
Add up your closing fees for that refinance. In this example let’s say your closing costs total $4,000. When you divide $4,000 by your monthly savings of $175 the result if 22.86, or almost 23 months. As long as you own the property for at least 23 months or longer, then a refinance might be a good move. If closing fees were $5,000 and the monthly savings were $75 then the “recovery” period is $5,000 divided by $75, or 67 months, more than five years. Not a good move. Many will say that a recover period of two years or less makes sense; anything longer should require more consideration.
Getting started is as easy as comparing rates from VA Loan Lenders and doing the math.