In light of the low interest rates that currently exist in the mortgage market it may be a great time for many homeowners to take advantage by doing a refinance. However, in addition to the interest rate, there are many other important factors one should consider when deciding whether or not to do a refinance. Below are three important questions questions you can use as a starting point when contemplating whether or not it makes sense for you to refinance your mortgage.
1. How long do you plan on staying in your home?
This may be the most important thing to ask yourself when deciding whether or not refinancing is right for you. It does you no good to refinance in order to save $150 a month if 7 months down the line you decide to move. So be honest with yourself when thinking about how likely it is–given your lifestyle, career, moving history, etc.–that you’ll be moving in the next year or so. If the odds are that you will be moving within the next year, you may want to hold off on refinancing until/if the point comes where you feel confident that you’ll be staying put for the foreseeable future.
2. What is your breakeven point?
If the first question is a non-issue for you then this question becomes the most important one for you to ask yourself. To explain, the “breakeven point” is essentially how long it is going to take you to recoup the costs of refinancing. For example; let’s say the total costs of your refinance are as follows: $2,000 in closing costs and $1,500 in pre-paid items. In connection with this let’s assume that your existing PITI (Principal, Interest, Taxes and Insurance) payment is $800, your current escrow balance is $900.00, and your monthly savings from the refinance will be $100. In this scenario the breakeven point of your refinance would be 18 months, meaning that it will take you that long to recoup the cost of your refinance and your savings would thereby begin in month 19. The calculation itself is simple but there are several dynamic factors that can and will influence your individual calculation (i.e. How much your existing payment is, when you made your last payment, when your first payment on the refinanced loan will be due, your existing escrow balance, etc.) To expand on this example a little further–if you are still in your home 4 years past the refinance closing date your accumulated savings from the refinance would be $3,000 at that point (48 months you will have lived in the home after refinance – 18 months to recoup the cost of the refinance = 30 months worth of $100 in monthly savings = $3,000 in accumulated savings).
3. What goal are you trying to achieve with the refinance?
Are you looking to pull cash out of your equity in the home to do things like pay off some debts, fund a major home improvement project, or to put towards a child’s college fund? Or is your goal to save money on your monthly payments? Another goal could be to save as much money as possible in the long-term by shortening the term of your loan. Whether or not a refinance is advisable in your situation could very well depend on which of these goals you’re looking to achieve. When inquiring with a lender this is definitely an important point to cover upfront.
As always thanks for reading!