You’ve seen all the ads on TV and in the newspaper telling you that now is the time to refinance your home. But is that really true? While your monthly payment may be lower if you refinance, you have to consider several factors to see if you are really saving any money.
What Will It Cost?
The first thing you should do is add up all the costs of refinancing your mortgage. These could include application fees, points, loan origination fees, an appraisal, attorney fees, a credit report, a home inspection, private mortgage insurance, title insurance, underwriting and a survey. When you have added up all of these costs, you will have the true cost of refinancing your home.
What is the Break-Even Point?
To figure out the break-even point, subtract the new monthly payment amount from your current payment amount. The divide your total costs by the difference of the payments. For example, if your current monthly mortgage payment is $1000 and your new refinanced monthly payment will be $900. You would be saving $100 a month. If your refinanced mortgage total costs are $3,000, then it would take you 30 months to break even and start saving money. If you plan to move within three years, it probably won’t be cost effective to refinance your mortgage.
Besides the actual monetary costs of refinancing, there are many hidden costs to consider as well. You will have to devote time and energy to completing paperwork necessary for the refinancing. You also may have to take time off of work to meet an appraiser at your home. You will also probably have to take additional time off work to attend the closing at the bank or mortgage company. You should seriously consider professional assistance from a real estate company, like The Dhanji Team among others, in order to better understand the intricacies of the closing process.
Understand the Refinancing Timeframe
When you choose to refinance your home, you are basically starting over time-wise. So for instance, if your original mortgage was scheduled to pay off the home in 30 years and you decide to refinance 6 years in, you will need another 30 years before you own the home. Be very careful and consider your age when you decide to refinance, or you may find you cannot retire for quite a long time.
Streamlining the Process
If you have a good relationship with the bank or mortgage company, have not been late on your mortgage payments and have a high credit score, you may be eligible for a streamlined refinancing. This will significantly reduce the fees you have to pay and the paperwork you have to complete.
So should you refinance or not? You’ll have to run the numbers to see how much you can save each month, even after the fees are paid. You may even be able to save on the fees with a streamlined refinance. At today’s low interest rates, it will usually be worthwhile to refinance if you plan to stay in your present home longer than 3 years.
If you do make the decision to refinance, your realtor or banker will be able to guide you through the process. Then you can start enjoying the lower monthly payments your new mortgage will bring.