December 11, 2001
By: Bev Dodd
Refinance home loan: Best options, best rates
A refinance home loan may be a viable option, even if the interest rate difference is less than 2%.
Most lenders will allow you to roll-in certain closing costs into the new refinance home loan. We'll discuss this more below.
It is often said that you should refinance when mortgage rates are 2% lower than the rate you currently have on your loan. A refinance home loan may be a viable option, even if the interest rate difference is less than 2%. A modest reduction in the loan rate can still trim your monthly payment. For example, the monthly payment (excluding taxes & insurance) would be about $770 on a $100,000 loan at 8.5%. If the rate were lowered to 7.5%, the monthly payment would be about $700, a savings of $70. The significance of such savings in any option will depend on your income, budget, loan amount and the change in interest rate. Trust your lender to help calculate the different options.
When you are faced with the need to compare different rate/point combinations among refinance home loan lenders, you should first convert each quoted rate to one based on a constant number of points and then find the lender with the lowest rate. In making this conversion, you should use a traditional rule of thumb that equates each point to a 1/4 of 1 percent change in the interest rate. This would make an 8 percent loan with 0 points equivalent to a 7.75 percent loan with 1 point.
In most cases, you will need at least some cash for closing FHA and VA loans. Although most lenders will allow you to roll-in certain closing costs into the new refinance home loan. If the value of your home is staying the same or increasing you may be able to increase your equity more quickly with a lower interest rate on a refinance home loan. If the value of your home is decreasing, it may not be a good idea to throw good money after bad for closing costs when your equity position may well be eroding.
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