When to refinance

When to Refinance

There are plenty of reasons for a homeowner to refinance a current mortgage. Lowering a monthly payment is probably the most popular reason, but there are others. Do you want to pay off your loan more quickly? Has your credit rating improved since you bought your home, allowing you to now get a better rate? Do you want to put some of your equity to work in other ways? Each reason leads to a different way of thinking about refinancing. Many homeowners start thinking about refinancing when the current interest rate is lower than their mortgage-loan rate. additionally, homeowners have been advised to follow the "2-2-2 rule" when considering refinancing. This rule of thumb says your new interest rate should be at least 2 percentage points below your current rate. You should have lived in the home at least 2 years. And, you should be planning to stay at least 2 more years. Although the "2-2-2 rule" is good advice in many cases, you should decide for yourself (with some professional advice!) what's best in your situation. If the market doesn't allow you to refinance into a lower-rate mortgage, you may still have a reason to change loans. Some homeowners want to extend a 15-year loan into a 30-year plan to lower their monthly costs. Other homeowners who don't plan to move for 5 years or more may benefit from a new mortgage even if it is only 1 percentage point lower than the old one. Here's how: Imagine you had a $200,000 mortgage at 8% over 30 years with a payment of $1,467 per month. If the loan amount is down to $175,500 (after making payments for about 10 years), you could use one of these stogies to lower your payment:

  1. Lower Rate. One method is to seek out a lower interest rate for the balance of $175,500. By lowering the interest rate to 7%, but maintaining the current payment schedule (20 more years of payments in the above example) your payment would drop to about $1,361 and the loan would still be retired at the original 30-year mark.
  2. Longer Term. Another way to lower your payment would be to prolong the length of the amortization. For instance, by getting a new 30-year mortgage for $175,500 at the 10-year mark, your payment would drop to $1,167 (at 7%).
  3. Cash Out.  Some homeowners pull equity out of their properties for home improvement, vacation, college costs, big-ticket purchases or to consolidate debt. Especially when interest rates are rising or stable, cashing-out is often the primary reason for refinancing.
  4. Change Loan Type.  Other folks refinance in order to change the type of loan they are paying off. Some homeowners grow uncomfortable with the variability of adjustable-rate mortgages and would rather have a fixed-rate loan. Others need to reduce monthly expenses and choose an adjustable-rate loan to lower their payment.
  5. Shorter Term. Monthly Payment: How much can you afford?

 

Determining how much you can afford to finance in today's market requires careful consideration and a bit of math. If you are thinking about refinancing an existing mortgage or buying a home, use these charts to help you plan. Then call us, so we can answer your questions and help you take the next step!

Lenders will usually allow you to spend 28% of your total--or gross--monthly income to make mortgage payments of principal, interest, taxes and insurance. The table below shows how much 28% is at various income levels.

**Principal and interest only; taxes, insurance and any homeowner fees not included. These will raise your monthly payment and reduce the amount of principal and interest and total loan amount you can afford. Loan amounts are based on a 30-year fixed-rate mortgage. For incomes over $100,000, add together the two loan amounts and add your down payment.

Annual IncomeGross Monthly IncomeAffordable Monthly Payment**
$20,000$1,667$467
$25,000$2,083$583
$30,000$2,500$700
$35,000$2,917$817
$40,000$3,333$933
$45,000$3,750$1,050
$50,000$4,167$1,167
$60,000$5,000$1,400
$70,000$5,833$1,633
$80,000$6,667$1,867
$100,000*$8,333$2,333
*For incomes over $100,000, add together the two appropriate columns.
Loan Amount: How much can you plan to borrow?
Once you know how much you can afford monthly, use this table to estimate how much you can borrow. Add your down payment to get an approximate house-hunting price range.
Monthly Payment**5%7%9%11%
$46786,99570,19458,04049,038
$583108,60387,63072,45761,219
$700130,399105,21686,99873,505
$817152,194122,802101,53985,791
$933173,803140,237115,95697,971
$1,050195,598157,823130,497110,257
$1,167217,393175,409145,038122,543
$1,400260,797210,431173,995147,009
$1,633304,201245,453202,953171,476
$1,867347,791280,625232,035196,047
$2,333434,599350,668289,951244,980