You just bought your home within the last year or so, does it make sense to refinance? Most people wait a few years before refinancing their mortgage. After all, they just paid all of those closing costs; do they want to do it all over again?
Given today’s rate environment, it may make sense to jump on the refinance bandwagon. There’s money to be saved and you could be a part of it. How do you know if now is the right time for you to refinance your mortgage? We help you understand below.
YOU MAY SAVE MONEY
First, figure out if you can save money on your payment. If you were lucky enough to snag a low interest rate when you bought the home, the savings might not be there for you. Other borrowers, however, may be able to lower their interest rate as much as 0.75% to 1%.
Decide how much money you would need to save for it to make sense. For example, is saving $50 a month enough for you? It doesn’t sound like a lot, but if you add it up, you’ll see the difference. Saving $50 a month for 12 months is $600 a year. Over the course of 30 years, you could save $18,000. We have your attention now, right?
YOU CAN FIGURE OUT YOUR BREAK-EVEN POINT
Now let’s look closer at the $50 a month savings. It will cost you to refinance your loan to save that money. How much you pay to close on another loan should play a role. Unless you know you will stay in the home forever, you have to figure out your break-even point. At what point will you pay off the closing costs with the savings? This is when you start realizing the actual savings.
For example, if it costs you $5,000 to refinance and you save $50 a month, your break-even point is:
$5,000/$50 = 100 months or just over 8 years
8 years is a long time away. It may not make sense to refinance. Now, what if the closing costs were just $3,000? Your new break-even point would be:
$3,000/$50 = 60 months or 5 years
5 years is better and is often the threshold for break-even points. Many people can figure out their 5-year plan. Will you still be here in 5 years or will you move soon after? If you don’t have long-term plans to be in the home, you may not benefit from refinancing.
Of course, the more money you save each month, the shorter the break-even point gets. Ideally, you want a break-even point that makes you believe beyond a doubt that you’ll realize the savings of refinancing.
YOU CAN LOWER YOUR TERM
Don’t worry that you’ll have to start from scratch on your mortgage term again – you don’t. Let’s say you had a 30-year term but paid on it for 5 years already. You can ask your new lender for a 25-year term mortgage. This way you don’t start over, losing the 5 years you already paid on the loan.
This is a great time to take on an even lower term too. If rates fall low enough, you may be able to get a similar payment but at a much lower term. Doesn’t paying your mortgage off in 15 or 20 years sound a lot better than 30 years?
Not only will you own the home faster, but you will also pay a lot less money in interest. When you cut even a few years off your loan’s term, you stand to save thousands of dollars in interest.
Keep in mind that some lenders require a certain amount of seasoning. In other words, you may need to have your mortgage for a certain amount of time before you can refinance. Find out what each lender requires and then refinance at the first opportunity. Each lender has different requirements too. Shop around and find a lender that will allow you to refinance now in order to take advantage of the low interest rate environment.