Perhaps you’re wondering if it’s time to refinance your home.
If you're like most people, your mortgage payment represents the biggest chunk of your monthly budget. It makes sense to try to save money on your mortgage whenever possible. A well-timed home loan refinance can be the ticket to saving thousands of dollars.
But before you jump at the opportunity to redo your loan, remember that refinancing costs money. Just like applying for a new home loan, there are appraisal fees, underwriting, and closing costs to consider.
A big part of the refinancing process is calculating when you would break even on these costs and reap the benefits of a lower interest rate. In some cases, it can take two or three years to break even and start saving money—but it’s often worth the wait.
If you're trying to decide if refinancing is right for you, here's a look at when refinancing can be a good idea and how to calculate your own break-even point.
Why do a mortgage refinance?
Refinancing is the process of getting a brand new loan to replace your old one.
By far, the number one reason homeowners refinance is to lock a lower interest rate. A general rule of thumb is that if you can reduce your interest rate by .75% or more, and you're planning on keeping your home for two years or more, it's worth looking into a mortgage refinance.
But there are other good reasons to consider refinancing, such as:
- Lowering your overall monthly payment and giving your budget a break
- Reducing the term of your loan (e.g., going from a 30-year to a 15-year loan)
- Switching from an adjustable-rate mortgage to a fixed-rate mortgage (and vice versa)
So, when it comes to your mortgage, it pays to keep tabs on your current interest rate. When interest rates drop, refinancing could definitely offer you a better deal. Even a one or two percentage point drop can save you thousands in interest over the long haul.
No-fee vs. fee-based mortgage refinancing
The bad news is, there's no such thing as a free refinance.
Because you're effectively applying for a brand new loan, you'll still need to shell out for things like appraisal fees, underwriting, and closing costs.
The good news is, you can choose to pay the costs up front or go with a no-fee refinance. With a no-fee refinance mortgage, you aren't required to pay thousands of dollars up front. Rather, these initial costs are waived by the lender and rolled into the new mortgage payment, which you can pay off over time—just like your principal and interest.
Keep in mind that some lenders will charge a higher rate if you waive your closing costs. If you know you're keeping your home for the long term, paying your closing costs up front can help you save even more interest.
In either case, refinancing with a more favorable interest rate is almost always worthwhile if you plan on staying in your home for some time.
How to calculate your break-even point
Remember that your break-even point is the time it takes to recoup the costs of refinancing and start saving money. So, how do you calculate it?
Here’s a quick example.
Let’s say you owe $300,000 on your existing mortgage. Your current interest rate is 4.5%, with 25 years left on the term. You've done some checking around and learned you can upgrade your mortgage to a 30-year term at 3.25%.
Using a mortgage calculator, you discover that you can save $214 a month at the lower rate of 3.25%. You've also talked to your lender, and she's informed you that the cost of processing your mortgage refinance is $3,500.
To get your break-even point, simply divide the cost of the refinance by your monthly savings, or $3,500/$214. That means it will take just over 16 months to hit your break-even point. After that time, you get to pocket that extra $214 every month. That's $2,500 a year in savings.
So, as long as you can stay put for 16 months, you'll break even on your refinancing efforts. Of course, it’s a better deal for you if you can stay longer.
No-fee loans don't have a break-even point.
Break-even calculations only apply to loans with fees. If you go with a no-fee loan, there's no break-even point to calculate. Simply subtract your new loan payment from your old loan payment, and that's your monthly savings.
One thing to keep in mind.
It’s always a good idea to talk to your lender or financial advisor to break down the numbers to see what you’ll be paying in total interest with a mortgage refinance. For example, if you refinance to a longer term, you may end up paying more in interest, even if your monthly payment goes down.
We put you in the driver's seat
If you're ready to take the next steps toward refinancing, we're here to help.
At Timios, our goal is to provide a fully transparent and user-friendly experience from start to finish. That means keeping you in the loop at every stage of the process: You always have full access to your files and an open line of communication to the professionals who can answer your questions.
We also know that staying within your budget is important. Our closing cost calculator provides guaranteed closing costs at the time of calculation, so you know exactly what your closing costs will be—even before applying for a loan.
Refinancing is a great way to maximize your mortgage. We’re here to ensure that nothing stands between you and the people who can help you save money.
To learn more about interest rates and what to keep in mind when considering a mortgage refinance, please click here.
With over 250,000 transactions and $40 billion in total closings, remaining true to our values has made Timios one of the fastest growing title and settlement services companies in America.