The first thing we must understand is that there are costs involved with refinancing. By totaling up closing costs, points, fees & any other expenses, we will determine the total cost of the refinance. We use the total costs to understand how long before the savings from your refinance will recoup the total costs.
The second thing we must compare is the new monthly payment on your refinanced mortgage. To get this, take your current home loan balance, your new interest rate and new loan term, and use the calculator to determine the new loan’s monthly payment. Compare the new payment to the old payment. Depending on your goal, your new monthly payment may be lower or higher than your original payment.
Let’s talk about why people choose to refinance.
A lower monthly payment and increase in monthly cash flow can be a huge help to people who’s income or life circumstances have changed. For those looking to refinance into a lower monthly payment, you want to consider the amount you’ll save with your new payment each month, and how long it will take for your new savings to offset the total cost of the refinance.
If you divide your total costs of your refinance with the amount you’ll save with your new monthly payment, you’ll know how many payments you will need to make on your new loan before you recoup the costs. This is also known as the break-even period. If you plan to move or sell the home before this break-even period, it does not make sense to refinance, as it will cost you more money than you would save.
One risk of focusing on lower monthly payment and the savings you’ll get there is you can miss the extra cost of interest in the long run. This leads us nicely into the other reason people choose to refinance.
By refinancing into a lower interest rate or a shorter loan term, homeowners can reduce the amount of interest they pay over the life of the loan. Similar to making extra payments on your mortgage, a lower interest rate will reduce the percentage of your loan you’ll pay each month in interest, and a shorter term will reduce the number of payments you pay interest on.
While your monthly payment may increase in this scenario, the savings come from the accumulated reduction of interest over the life of the loan.
Refinancing is a great tool for homeowners who need to adjust their home loan to meet their needs, but sometimes refinancing just doesn’t make financial sense. In those cases, home owners still have options to reduce interest and save.
Because the interest rate on your home loan is directly tied to how much you pay on your overall mortgage, lower rates usually mean lower monthly payments.
Check out this example of monthly payments (principal and interest) on a 15-year fixed-rate loan of $250,000 at 5.5% and 4.0%.
With a 1.5% difference in interest rate, there is a $34,827 difference in interest paid! Imagine what you could do with that in your pocket!
With so much of your hard-earned money on the line, it’s best to seek advice from a trusted home loan expert and have the confidence that you are in qualified hands.