You’re looking at nearly 50 months to break even. The total costs of $7,100 divided by your monthly savings of $144 equals about 49 months. Considering the time and effort involved, this might not be the best financial move. Think about future financial conditions, like interest rates and housing market trends, as they will heavily influence whether this decision benefits you.
As a rule of thumb, refinancing is advantageous if you can reduce your rate by at least 1% without paying points.
If you switch to a conventional loan, your rate might be similar or higher than your current 7.25%. You would also need an appraisal to verify you’ve reached 20% equity.
Jesse said:
If you switch to a conventional loan, your rate might be similar or higher than your current 7.25%. You would also need an appraisal to verify you’ve reached 20% equity.
I’m wondering, if it’s clear you have well over 20% equity and no PMI, is an appraisal still necessary?
@Tian
To eliminate PMI, switching to a conventional loan is required. An appraisal is typically necessary unless the automated underwriting system grants an appraisal waiver, which depends on the property’s risk profile.
@Jesse
Thanks for clarifying. It seems appraisals are usually required unless the automated system indicates otherwise.
Tian said:
@Jesse
Thanks for clarifying. It seems appraisals are usually required unless the automated system indicates otherwise.
Exactly, the automated system assesses the risk and property details to decide if an appraisal can be skipped.
@Jesse
Or if you originally put down a substantial down payment and a significant amount of time has passed.
@Tian
Typically, yes. Appraisal waivers are more likely when refinancing within the same loan type, like Freddie to Freddie or Fannie to Fannie. Moving from FHA to a conventional loan usually requires an appraisal.
@Tian
We needed an appraisal even though we had significant equity due to a sharp increase in home value. It was worth it for the lower rate offered at the time. After all costs, it took 11 months to recoup the expenses through the interest savings.
When considering a refinance, it’s important to calculate the break-even point. If you plan to stay in your home for the next five years and the refinance saves you $500 per month, with total fees of $6,000, your break-even is 12 months, making the refinance worthwhile. Ideally, you should keep the same loan term you currently have.
It’s worth comparing to make sure you’re getting a good deal. You can find helpful comparisons online.
Utilizing the FHA streamline refinancing option can be beneficial as rates decrease. You might consider several streamlines until rates stabilize, then switch to a conventional loan. This strategy takes advantage of FHA’s strict net benefit requirements for borrowers.
Although the payment may seem higher initially, remember that FHA loans include PMI for the life of the loan. With a conventional loan, that money would contribute towards your principal, interest, taxes, and insurance.
@Cai
If you need more detailed calculations, feel free to reach out. I’m here to help!
A 10-month break-even period is relatively short and could be beneficial depending on your long-term financial goals.
It’s generally advised to refinance only if the rate drop is at least 1%. I’m not sure a $144 saving is worth the refinance. You might want to wait and see if rates drop further.
Why not wait a little longer to see if interest rates decrease further?
It’s usually recommended to pursue refinancing if the rate reduction is at least 1% or greater.
I’d hold off for a few more months. The political and economic climate might lead to further rate cuts.