Refinancing your home is personal
For many homeowners, it pays to refinance to save $ 100 per month. Whether this applies to you depends on a number of factors.
Do you need that extra wiggle room in your budget? Are you staying home long enough to break even?
Or, you can refinance to achieve another goal, such as: B. Pay off your equity or repay your loan early? In this case, the monthly savings may not matter.
Only you can decide whether your circumstances make refinancing your home worthwhile.
Check your refinancing eligibility (December 7, 2020)
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The rule of thumb for refinancing to break even
Refinancing should generally save you money over the long term in order to really pay off.
While each situation is unique, there is an easy way to decide when to refinance by calculating your “break-even point” – the point at which your refinancing savings outweigh your closing costs.
Typically, to break even and see real savings, you will need to stay home for at least a few years after refinancing.
"But knowing how long you will be staying in a house is not easy," says Ralph DiBugnara, founder of Home Qualified.
As a simpler alternative, he suggests, "You should try to recoup your costs in the first 24 months of the loan."
DiBugnara explains, “Let's say you saved $ 300 per month after refinancing, but your closing cost was $ 6,000. Here you would amortize your costs in 20 months. Then your savings would keep multiplying each month. "
Check your refinancing rates (December 7, 2020)
Is It Worth Refinancing To Save $ 100 Per Month?
For example, let's say you review today's refinance rates and estimate that one refinance could save you $ 100 per month on your mortgage payments.
To determine whether this refinancing is worthwhile, you need to carefully examine your refinancing costs.
Keep in mind that your closing cost will likely be between 2 and 5 percent of the principal of your new loan. With a credit balance of $ 200,000, that's at least $ 4,000 out of pocket.
If you save $ 100 a month, it will take you 40 months – more than 3 years – to recoup your closing costs.
Refinancing can therefore be worthwhile if you want to stay in the house for 4 years or more. Otherwise, it would likely cost more to refinance than you would save.
However, the estimate of closing costs of 2 to 5 percent is not set in stone. Negotiate refinancing with your lender with no closing costs. Your rate might be a little higher than the market rate, but still a lot lower than your current rate. Read on for more information on these loans.
With the right offer, you can start saving in months, not years.
Is it worth refinancing at a 1% lower interest rate?
Erik Wright, owner of New Horizon Home Buyers, suggests another option to consider refinancing.
"If you want to save on monthly payments," he says, "I would suggest refinancing if it lowers your interest rate by 1 percent or more."
For example, let's say you decide to refinance a loan balance of $ 200,000. Your current mortgage rate is 3.75% and your new rate is 2.75%. This would lower your interest rate by 1 percentage point.
This is how the math works:
Loan Balance: $ 200,000 Current Mortgage Rate: 3.75% Current Monthly Payment: US $ 1,200 New Mortgage Rate: 2.75% New Monthly Payment *: $ 845Monthly Savings: $ 355
* Refinancing savings calculated with the refinancing calculator from The Mortgage Reports. Your own rate and savings will vary
Assuming your closing costs total $ 6,000 (3% of the loan amount), your new loan would pay off in about a year and a half.
So, if you're planning on staying home for at least two years or more, this refinance is likely worth it.
However, the 1% rule does not apply to everyone. Someone with a very low loan balance, such as $ 100,000, may not be able to refinance because the dollars they save are not that high. And someone with a $ 800,000 loan balance may want to get a refinance of just 0.25%.
Should you opt for refinancing without closing costs?
If you don't have the prepayment funds to refinance but you can get a much lower interest rate, you can include the closing costs in your loan balance to avoid the out of pocket expenses.
This means that instead of paying upfront, you are paying interest on your closing costs – which will cost you a lot more in the long run.
Another option is refinancing without closing costs.
Refinancing with no closing costs means your lender will pay some or all of the closing costs. In return, you pay an interest rate that is above the market. However, that higher rate is likely to be much lower than your current rate.
If you take the higher interest rate, you will cost you more than the closing cost itself in the long run. However, you get a risk-free refinancing. Even if you sell or refinance again within 3 months, nothing is lost.
However, if you are spending $ 4,000 to bring your price down, you will have to sell your home in 6 to 12 months. That money is gone forever.
Because of this, many people opt for a slightly higher interest rate and can refinance every three months if interest rates keep falling.
Others want the lowest rate humanly possible.
"You have to look at what you are saving each month and in the long term," suggests DiBugnara.
"If you need a short-term loan because you are about to move, it may make sense to pay more interest rather than add to your loan balance," he says.
"However, if you are staying in your home longer, it almost always makes more sense to use the lower interest rate and either include the closing costs in the loan balance or prepay those closing costs when you close."
So should you pay upfront or finance the closing costs?
Because borrowing is currently extremely cheap, "I almost always encourage my clients to weigh in on closing costs," said David Dye, Founder and CEO of GoldView Realty.
“I would prefer my clients to keep their money in reserve in case difficult times arise than to spend it to pay the closing costs. The certainty of having an extra month or two in reserve is often much better. "
How is your refinancing rate determined?
The amount of money you can save by refinancing your mortgage depends on several factors including your new interest rate, your creditworthiness, and your loan-to-value ratio (LTV).
“The interest rates are unique to each borrower's situation. They are mainly determined by two factors: credit score and mortgage lending value, ”says Dye.
A higher credit score usually brings you a lower mortgage rate. This is especially true if you are using a traditional loan.
As for the LTV, the lower your LTV – that is, the more home equity you have – the lower the interest rate on your new loan will likely be.
The amount you can save by refinancing depends on several factors, including your new interest rate, your creditworthiness, and your loan-to-value (LTV) ratio.
Your potential savings also depend on whether you are currently paying private mortgage insurance (PMI) or an FHA mortgage insurance premium.
If you have at least 20% equity on the refinancing, you may be able to eliminate PMI or MIP and increase your savings.
"If the value of your home has increased so that you have at least 20 percent equity based on the estimated value and current balance of your mortgage, you may be able to drop PMI payments on refinance, which can trigger even more monthly savings," says Wright.
Check your refinancing eligibility (December 7, 2020)
Other good reasons for refinancing: It's not always about savings
A refi can be worthwhile even if you don't pocket more than $ 100 a month or more.
"Some people who have built significant equity in their home can use a refi to cash out," Wright says.
"Many seek a refi payout not necessarily to save money, but to fund an expensive home improvement project, pay tuition, make an investment, finance a wedding, or pay off other debts like high-yield credit card debt."
Refinancing can be worthwhile if you can withdraw cash, shorten the life of your loan, or switch from an ARM to an FRM – even if your monthly payment doesn't go down.
Alternatively, you can refinance to shorten your repayment term and save thousands in interest in the long run.
"For example, let's say you have 25 years left on your 30-year mortgage. (It) has $ 300,000 in credit, 3.5 percent interest, and $ 1,347 a month," says DiBugnara.
“You refinance yourself with a 15-year mortgage at 2.5 percent. Your new monthly payment is $ 2,000. However, it will only cost you a total of $ 360,066 to repay your loan, instead of $ 450,561 if you haven't refinanced.
"That's a saving of nearly $ 90,000. You also cut the loan term by 10 years," he explains.
If you currently have a variable rate mortgage, refinancing to a fixed rate loan can be reassuring with consistent monthly payment amounts that no longer fluctuate from month to month.
This is how you decide whether a mortgage refinancing is worthwhile for you
Ultimately, the decision as to whether or not to refinance is yours. To help you make a more informed choice, it pays to determine:
“In most cases, refinancing at a significantly lower interest rate offers more positive options. This creates a stronger position that will help you achieve your goals whether you want to get cash out of your house, lower your monthly payment, or cash it out faster, ”added Wright.
According to Dye, the two most common objections to refinancing are the costs involved and the idea that your loan will start over.
"But don't forget that if you don't have the upfront payment for closing costs, you may be able to put those expenses into your loan," he says.
“And with some lenders, you can keep your loan for the same term. For example, if you have 24 years left, your lender may agree to start your new loan with 24 years remaining. "
Remember, you don't have to refinance with your current mortgage lender.
If you can find a lender who offers lower interest rates, better loan terms, or ideally both, you can refinance with another company.
That is why it is always worth looking around when refinancing and finding the best offer.
Check your new plan (December 7, 2020)