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Monday, June 27, 2011
Refinancing mortgages
Let’s say that every time you can get a 0.25% points drop in your mortgage rate, you breakeven in terms of refinancing (refinance charges cancels out the improved rate). So, you start at 6% interest rate, and you refinance to 5.75%. It’s breakeven. Then you refinance at 5.50%. You breakeven. And on and on, and here you are, now at 4% interest. And you still owe as much over the life of the mortgage than if you didn’t refinance at all.
You could instead wait for a 0.5% drop. And refinance every time there’s that amount of a drop. You’ll get a net positive. And by the time you are at 4%, it would be the same as if you did a single refinance when it went from 6% drop to 5% drop.
What I am interested therefore is if someone has run simulations based on various time periods to see the optimal point at which you should refinance.
And please, no “it depends”. I know “it depends”. Everything in life “it depends”. Just state your various assumptions so you can give us some answers.
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