This summer, refinancing was recorded as one of the most popular mortgage applications submitted to lenders throughout the country. It’s a smart, cost-effective option for many homeowners, but remember that this home financing option isn’t for everyone. Check out our list to determine if refinancing will save you money!
Know what affects the profitability of a refinance: According to the Huffington Post, a refinance will be profitable “if the sum of all the costs arising from the finance during the period you expect to have it is less than the sum of the costs of the old mortgage over the same period.” There are specific costs (and savings) that you should look at when comparing a refinance to your current mortgage.
- Current mortgage: Monthly payments (including interest), mortgage insurance premiums (if any), lost interest on upfront and monthly costs
- Refinance: Origination charges paid at closing, monthly payments (including interest), mortgage insurance premiums (if any), lost interest on upfront and monthly costs, tax savings, the reduction in loan balance
Calculate a break-even period: A break-even period refers to the period of time when the costs of your current mortgage and those of a refinance are equal. The length of the break-even period largely relies on the difference between the new interest rate and the rate on your current mortgage, and the cost of the new loan compared to the cost of your current loan. If you calculate this difference and see that your refinance will last longer than your break-even period, then you are ready for a refinance!
Double check your numbers with a mortgage calculator: If you aren’t completely confident in your numbers, make sure to double check with a mortgage calculator. This will easily allow you to determine if your refinance will save you money.
If you are still struggling to determine if a refinance will save you money, make sure to discuss your options with a local lender. These trained specialists know the industry well—so don’t hesitate to ask for their opinion!