QI've Read That That Home Refinancing Makes Sense When You Can Get An Interest Rate That Is At Least 2% Lower Than Your Current Rate. Is This A Wives Tale?
AThe answer is both yes and no. Should you refinance if you can get an interest rate that is 2 percent lower than your current rate without paying excessive up-front fees? It might be a good idea. Is that the only time you should refinance? Absolutely not. Home refinancing can make sense even if you're only reducing your current interest rate by 1 percentage point. For example, a $200,000 loan at 7 percent interest spread out over 30 years would cost you about $1,330 per month. Refinance that loan at 6 percent over 30 years and your monthly payment will drop to $1,199. That's a difference of $131 each month. While that may not seem like much at first, over the term of your loan that monthly difference equates to over $40,000 in savings. Not bad for a one-percent reduction in your interest rate. Rather than being determined solely by your interest rate reduction, whether or not home refinancing makes sense for you will be determined by a combination of the amount of your interest reduction, the costs associated with refinancing, and the length of time you plan on staying in your current home.