Ever wondered if mortgage refinancing would be a beneficial step for you to take? Well, here’s an attempt to simplify the process of mortgage refinancing to help you understand whether or not it is the right choice for you.
So exactly what is Mortgage Refinancing?
Mortgage refinancing in its simplest form occurs when someone takes out a second mortgage on their home to pay off the first mortgage on that same home. Mortgage refinancing, if done at the right time, can be very beneficial due to savings realized from lower mortgage rates and reduced monthly payments. Mortgage refinancing, however, is not necessarily the right solution for all individuals and households. This is because there are several choices involved in the application process that can either negatively or positively affect your overall savings. Therefore, it is crucial that you understand the process to determine whether or not mortgage refinancing is the right choice for you.
To find out whether or not mortgage refinancing will result in more profit than loss, you first need to calculate the break-even point on your new loan, using a mortgage calculator is the easiest and more effective method. The break-even point is the point in your mortgage repayment period at which you start realizing savings on your monthly loan payments. The break-even point helps determine whether or not mortgage refinancing is worth it for you. One important factor that needs to be taken into consideration is the length of time you plan to live in that particular house because it usually takes some time before savings on your refinanced loan start flowing in. The easiest way to calculate the break-even point on your new mortgage is to first compute the amount that your monthly payment decreases from your old loan to your new loan. Then you need to add up all the costs involved in the refinancing process, such as prepayment penalties and closing costs. Finally, you need to divide the total savings into the total costs to get the number of months that it will take to reach the break-even point in your refinanced loan.
Here’s a quick example:
Let’s say that refinancing your mortgage causes your monthly payment to reduce from $1,500 to $1,200 and the total costs associated with refinancing add up to $6,000. You simply divide the $6,000 in costs by the $300 in savings and the answer reveals that it will take 20 months for you to begin earning savings on your refinanced mortgage. Let’s say the family in this example is planning to live at that residence for approximately 5 years. In this case, it will make sense to refinance because they will start earning savings on their monthly payments after 1 year and 8 months, or 20 months, of living at that residence. However, if the family only plans to stay at that residence for 1 year, then mortgage refinancing is not that right choice for them because they will not realize any savings in the next year.
Another key factor that needs to be examined when calculating mortgage refinance gains versus losses is the annual percentage rate, or APR interest rate, on the old mortgage compared to the APR on the new mortgage. Many people seem to think that you can get a lower monthly payment simply by refinancing to a loan with a lower interest rate. This belief is far from the truth due to the fact that there are other costs and fees involved in the refinancing process that need to be taken into consideration. APR is a better and more accurate basis of comparison to evaluate the difference between two separate mortgage loans. The APR on your refinanced mortgage takes into account other important expenses in addition to the base interest rate, such as whether you have a fixed or adjustable rate, the length of the loan period, discount points, and all other charges including, origination fees, application fees, appraisal fees, insurance costs, and so on. Using APR to compare your current mortgage to a refinanced mortgage helps accurately determine whether or not mortgage refinancing is the right choice for you.
Mortgage refinancing, if done at the right time, can result in a lower interest rate on your mortgage which consequently results in a lower monthly payment. As mentioned above, although you may get a lower interest rate on your refinanced loan, it doesn’t mean that you will instantly start realizing savings. The savings are sometimes lost in the costs associated with getting a new loan and paying off an old loan before the end of its term. The break-even point and annual percentage rate (APR) are two key factors that need to be used when evaluating whether or not mortgage refinancing is a suitable option for you. The break-even point helps determine if mortgage refinancing will provide you with savings based on how long you plan to stay at that particular house, and APR helps to compare the true costs associated with your old mortgage and new mortgage refinance loan. So by now you should have a good idea whether or not mortgage refinancing will be a beneficial step for you take in terms of lowered costs.
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