This article will attempt to help you deciding right, economically, when to perform mortgage refinance. As usual – please advise that mortgage refinancing is a very personal decision that takes affect by your personal status, financial status, credit score and current mortgage and home conditions. All real decision should be done vis a vis your mortgage and personal status, while advising with professionals.
Economically, the best way to decide upon home refinance is not by using “rules-of-tumb” nor even to look at the “break even point” but to check your total costs in each alternative: How much overall payments will you eventually pay from this point forward with your current mortgage and how much will you overall pay if you refinance.
The period for examining the future costs for each mortgage should be one of two alternatives: either use each mortgage’s costs until it ends, or as long as you intend to stay in the property. If the total costs are lower with the new mortgage, refinancing is advisable.
To perform these tests your best option is to use a mortgage calculator or even a Home Refinance Calculator. But now, don’t forget about “break-even point period”, which is the minimum length of time the loaner needs to stay in the property in order for the refinance process to cover its costs.
I.e. if our costs for refinancing are around 8,000 $, and each month we will save 245$, then it will take us 8000/245 = 32 months to “break even”. This is very important since most people have no idea if they are going to leave the property or not – so the break even point can show you the indication to how long will the refinance process will cover its costs. in the example above, if there is a chance you will leave your home (for any reason) before 3 years have passed – than the refinancing is not worthwhile.
Also, be sure to compare the right amount of principal if you chose a No Cash Mortgage – a mortgage that will add the closing costs to the principal of the loan.
Another two factors that are sometimes overlooked are [a] the interest we could have gained from the amount we are saving each month. [b] the tax reduction lost from improving our interest rate.
I do not wish to get into tax aspects but to demonstrate point “A”, here’s an example:
We are saving now 150$ each month on a new loan for the next 8 years. Our breaking point will be in 2 years, meaning our closing costs were 3,600 $.
Let’s say that you can get a yearly interest of 2% in a bank deposit:
So we lost 1% x 3600 = 36 $ in interest since we paid closing costs, and gained 5 x 12 x 150 x 1% = 90$.
This example shows small amounts, but normally these sums can be much higher, especially since interest rates will fluctuate throughout the years. From this reason, taking 1% on the amount gained – is not very accurate.
Savings from insurances fees change or increased costs caused by state, government or other taxes and/or escrows should be also considered.
An example to extra insurance fees that can happen due to refinancing we may see in No Cash Mortgages or No Costs mortgages where the principal becomes more than 80% of the property value, which causes for the lender to request loan insurance.
In conclusion, deciding whether mortgage refinance is a good choice has many factors to consider. We have seen some of these, but every loan and lender are different. Be sure to include all the costs and savings you may have.
Mortgage Refinancing your loan or mortgage, or as also called Home Refinance is an option worth considering when the market rates and offered loans are lower than the rate in your running mortgage.
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