|What sense does it make to refinance?
This is the age-old question we are asked time and time again on nearly every refinance scenario. Nobody wants to refinance their home loan with any shroud of doubt as to whether it is the best financial decision. So how do you determine whether the cost benefit is the right choice for you and your family?
Two tests will determine if your refinancing your mortgage makes sense or not.
1. Does it break even with cash on cash?
Put another way, are the monthly savings generated by refinancing large enough to offset the costs of securing the new loan? Specifically, at what point in time can you expect to recuperate your investment? For example if you’re able to save $150 per month on a refinance and your closing costs are approximately $2600, you’ll break even in 17.33 months. Total closing costs divided by monthly savings equals break-even point in time.
2. Does it break even with the interest savings over time expressed as a monthly figure?
If the payment savings doesn’t produce a cash-on-cash benefit but the amount of interest you’re saving overtime is substantial, that money can be divided by the term of the new loan to justify a monthly payment benefit. For example, let’s say you have a 30-year, fixed-rate mortgage you took out a couple of years ago at 4.625 percent. You can refinance today into a new 20-year fixed rate loan at 3.5 percent. Because you’re on an accelerated amortization schedule, the principal and interest payment on the new loan will be higher. So, payment will be higher, and the rate will be lower right? The difference in interest rate relative to the compared loan amounts in such a scenario could easily produce a substantial breakeven on the interest savings, perhaps as high as $50,000 less in interest. Using that $50,000 as an example, that’s a monthly savings of $208 per month on a shorter-term mortgage!
Interest savings over time between your loan and the new loan divided term of the new loan equal monthly interest savings. Total closing costs divided by monthly interest savings equal breakeven point in time.
If your breakeven point in any of the tests above are longer than the amount of time you intend to keep the loan for, refinancing probably would not be in your best financial interest. Generally, if you can refinance your home loan and breakeven in 36 months or less, it makes sense. If refinancing takes longer than three years, give it a second thought and really take into consideration how long you intend to keep the loan for. Following are some considerations in determining whether refinancing is right for you:
• You plan to sell the house;
• You might refinance the same house again;
• Your job or income might be changing;
• The interest rate is set to change on the adjustable rate mortgage if you have one presently;
• The value of your home is in question;
• Are you in need of extra cash?
• Do you need to be debt-free sooner?
To determine if your refinance makes sense, run the tests. These tests stand the test of time. If you’re considering a refinancing your mortgage, contact a mortgage lender who understands and is willing to perform a cost-benefit analysis for you at no charge. This is a lender that will give you the right information so you can make the best choice possible for your unique situation. You can receive a complementary refinance cost-benefit analysis from us, today. Learn when refinancing does make sense.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.