Months after the controversial Brexit vote that caused mortgage interest rates to plummet to record lows, rates remain attractive. As a result, many homeowners are still considering a refinance as a means to either tap into their home’s equity or save on monthly payments.
But for very specific reasons, refinancing is not always feasible for everyone. If you’ve been 10 to 15 years deep into your current mortgage, it would be unwise to refinance. Your credit score and debt-to-income (DTI) ratioare also major considerations. Given all other factors remain constant, however, you may ask: “Is there any way for me to determine if a refinance will save me money?”
Good news! There in fact, are. Below is a checklist of aspects you need to carefully look into in order to make smart decisions about refinancing:
Calculate the Break-Even Point
This is the most important math you need to get your head into when refinancing. Calculating the break-even point lets you know how much time during the duration of the refinance you will be able to recoup the cost you paid for closing.
For example, if you know you will be able to save $100 a month on your new loan and it cost you about $3500 in closing, you need to divide $3500 with the $100. The resulting value will tell you the number of months that need to run before you get back the money you’ve put in for closing.
If you decide to move before this period, that means you are losing money on the refinance.
Consider Closing Costs
Closing entails about 3 to 6 percent of the loan amount. If you don’t have the money to fund the purpose, you can consider zero or no-cost refinance. However, you will have a higher interest rate and this way, you will not be able to save because you will be borrowing more. It’s a better strategy, therefore, to pay the fees upfront even if it might mean some necessary initial sacrifice.
Look Into Your Monthly Savings
Your monthly savings would depend on the interest rate you will get. The lower it is , the more you will save. Ask quotes from lenders and calculate the new payments you will have monthly. Compare this with your current payment and subtract the difference between the two amounts. The resulting number is the amount you will save.
Think About Tax Deductions
You might be worried that your new mortgage would no longer be subject to tax deductions. Worry no more – the Internal Revenue Service(IRS) considers refinanced debt as home-acquisition debt, giving you the continued privilege of still being able to deduct the interest on the amount of your current mortgage. That means the new mortgage remains deductible.
In the case of current vs new, zoom into the fine details:
|Current Mortgage||New Mortgage|
|monthly payments with interest, mortgage insurance premiums (if applicable), lost interest on upfront and monthly costs||origination charges at closing, monthly payments with interest, mortgage insurance premiums (if applicable), lost interest on upfront and monthly costs, savings on tax, balance reduction|
There are various online tools you can use to aid your calculations. But to get near-precise results, make sure your input are also on-point. Labor with estimates. And talk to a lender to get guided support.