In this era of probably-soon-to-be-gone low interest rates, homeowners may be asking themselves if now is a good time to refinance their homes.
To be able to answer this question, you need to first answer these three questions: Will a lower rate actually work in your favor? How much will the refinance (refi) cost? And how long do you intend to own the property after the refi?
To put this into numbers, let’s say your remaining mortgage balance is $150,000, and it will cost you $2,000 to lower your rate by one-quarter of a percent.
We’ll assume that you’ll pay the closing costs out of your own pocket.
You’ll go from 4.75 percent to 4.5 percent. Your current mortgage payment (on your original, 30-year, fixed-rate $160,000 mortgage) is $834.64 per month. Your payment at the new rate will be $760.03. This is a monthly savings of $74.61.
To calculate the time required to recoup the costs of the refi, we need to take the $2,000 cost and divide it by the monthly savings.
In this case it would be $2,000/$74.61, or 26.8 months.
So if you are planning on staying in your home for more than two years, it would be worth your while to contact your mortgage professional and explore your options.
Of course, larger loan amounts will have a shorter payback period, and smaller loan amounts will take longer to recoup with the same interest rates.
A change in interest rate of greater than 0.25 percent will also shorten the time required to justify the costs of the refi.
For example, a drop in the interest rate of 1/2 percent in the above case would make the new rate 4.25 percent and provide a monthly savings of $96.73 per month. The recoup period would be just over 20 months.
Contact us today to help you adjust the above scenario to your own situation.No matter your financial situation, we’d love to help!