When to Refinance your Mortgage

There are many reasons why someone would refinance a mortgage.  Some of those reasons could be: to replace an adjustable rate mortgage with a fixed rate, to settle a divorce or to eliminate FHA mortgage insurance.  Some people choose to refinance because they could save thousands with a new interest rate altogether.  Others do so to shorten the term of the loan, which has the potential of drastically lowering the overall cost of the loan.

If you’re having trouble deciding, let the numbers do the talking for you.  Use the formula below to understand whether refinance is just what you need:

Break-even point = Total closing costs/monthly savings

To decide whether or not a refinance makes sense, calculate the time it will take to break even, in other words, the time it will take for the refinance to pay itself off.  You don’t want to take out a new 30 year loan that will end up costing more by the end of the term than what you are paying now.

After calculating your break-even point, consider whether or not you plan on having your house for that long.  If the answer is no, then it is probably not the right time to refinance.

You can also look at the equity of your home.  That is, the difference between the amount you still owe on your home and the amount your home is worth.  It’s smart to refinance when you have a decent amount of equity.  Aside from saving you money, refinancing for a smaller interest rate can also help you to more quickly build on that equity.

Consider this:  You have a 30 year, fixed rate mortgage on a $100,000.00 home, on which you are currently paying $805 a month.  Let’s say you choose to refinance so that your interest rate goes from 9% to 5.5%.  This new interest rate can cut the term in half to 15 years, with only a slight change in your monthly payment (about $10 more).  In this case, the refinance is most definitely a smart choice.

When doing that math, are you thinking about just how much you’d save over the life of this loan?  It really can be a life-changer.

If you have any questions regarding refinance, whether you just want to learn more, or you want to know whether it’s right for you, give us a call.  Let Equity Mortgage Lending walk you through it.