Refinancing always sounds like a good deal when you can reduce your interest rates and monthly payment son your mortgage but does it always make sense to refinance your mortgage? Not always, which is why you should do some calculations before hand to make sure it will really benefit you in the short term and long term.
The Short Term
The short term benefit of refinancing is realizing a monthly savings on your mortgage payments. Reducing your interest rate enough to realize a substantial monthly savings can be very attractive to many potential refinance customers but this may be short sighted.
The Long Term
The long term takes into consideration much more than the monthly savings you may realize from refinancing your mortgage. The long term picture should include:
- Change to your remaining term
- Change to your mortgage balance
- Cost of the refinance
- The time frame you estimate you will continue to own the property
Below you will find a calculator to estimate your savings from refinancing your mortgage. Enter your numbers and find out what your savings might be. After you are done with the calculations we will use some of the figures to analyze your results.
If the “Net Savings” was negative then refinancing will not be in your best interest. If your “Net Savings” was positive then refinancing may make sense and we should move on to another quick calculation.
With a positive “Net Savings” we should now calculate your break even point or the point in time where the cost to refinance is made up by your monthly savings. From your results in the calculator take your “Closing Costs” and divide that by your the monthly savings in the “Difference” column on the “Mortgage Payment” column. Here might be an example:
Closing Costs = $5,000
Difference = $133
Break Even = $5,000 / $133 = 37.59 or 38 months
This will help you in making the decision on whether refinancing will make sense based on the time period you expect to continue to own the home. In the example of above, if you planned to sell within about three years (or 36 months) then you will not recoup the cost of refinancing within the time period. If, however, you were planning to move in five years (or 60 months) then you would recoup your costs because after month 38 you will realize savings each month with your reduced payments.
We want to hear from you…
Did you refinance recently? Looking to refinance? What do your calculations show?