emmanuelHow to Calculate How Much You Could Save by Refinancing
To know if refinancing your mortgage makes sense, you need to crunch some numbers. Compare your current mortgage details to current interest rates to calculate your potential savings.
1. Current Mortgage Details
Gather your mortgage statement to see your current principal balance, interest rate, and remaining term. For example, you may have a 30-year fixed mortgage with a 5% interest rate and owe $200,000.
2. Current Interest Rates
Check sites like NerdWallet, Bankrate or your local bank’s website to find current rates for your mortgage type. Say rates for a 30-year fixed mortgage are now 3.75%.
3. Calculate Your New Payment
Use a mortgage calculator to determine your new monthly payment at the current rates. For a $200,000 mortgage at 3.75% over 30 years, your new payment would be around $890.
4. Factor in Closing Costs
Closing costs average 3-6% of your mortgage amount. On a $200,000 mortgage, that’s $6,000-$12,000. Make sure your interest savings will offset these fees within a reasonable time, say 1-2 years.
5.:Check Your Savings
If your new payment at the lower rate would save you $200/month, that’s $2,400/year and $72,000 over 30 years. Factor in closing costs, and in this example you’d break even in 3-6 years and save $60,000-$66,000 total.
Refinancing could significantly lower your interest costs over the life of your mortgage. But make sure the math works out in your favor before proceeding. Crunch the numbers to calculate your savings and see if refinancing your mortgage really is worth it.
Factor in Closing Costs When Deciding if It’s Worth It
When deciding if refinancing your mortgage makes sense, you’ll want to consider the closing costs. These fees, which typically range from 2% to 5% of your loan amount, reduce your potential savings. So crunch the numbers to make sure refinancing will actually benefit you in the long run.
For example, say you currently have a $200,000 mortgage at 5% interest, and you’re looking to refinance to a 4% rate. If closing costs are $5,000, that means you’ll have to keep the new mortgage long enough to recoup that amount before you start actually saving money. In this case, it would take about 2.5 years to break even. So if you plan to move sooner than that, refinancing may not be worthwhile.
However, if interest rates drop significantly, the savings can be substantial. For instance, if you refinanced that same $200,000 mortgage from 5% down to 3.5%, your monthly payment would decrease by $150. Even with $5,000 in closing costs, you’d recoup that amount in just under 2 years and save over $25,000 in interest charges over the life of the loan.
Compare Interest Rates and Term Lengths
One of the biggest ways to save money on your mortgage is by refinancing at a lower interest rate. But refinancing comes with closing costs, so you need to make sure the numbers actually work in your favor before going through the process.
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Compare Your Current and New Rates
Interest rates change frequently, so the rate you have now may be higher than what you can get today. Compare your current rate to current market rates. For every 1% drop in your rate, you can save thousands over the life of the loan. But don’t just look at the rate—check the APR or “annual percentage rate” which includes fees. Your new APR should be at least 0.5-1% lower to make refinancing worthwhile.
Consider Shorter Loan Terms
If interest rates have dropped significantly since you got your original mortgage, you may be able to refinance into a shorter-term loan like a 20 or 15-year mortgage. Although the payments will be higher, you’ll pay tens of thousands less in interest charges. Shortening your term by just 5 years can save you over $50,000 in interest on a $250,000 loan.
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Calculate Your Break-Even Point
There are fees involved with refinancing, like appraisal and origination fees. Estimate how long it will take you to “break even”—for the interest savings to outweigh the fees. If it’s within a few years, refinancing is probably a good option. But if it will take 5-7 years to break even, rates may drop again in that time, so you’re better off waiting.
Consider Your Timeline
Think about how long you plan to stay in your home. If you may sell within a few years, refinancing may not save you money in the long run after accounting for fees. But if you plan to stay for 10 years or more, you’ll have plenty of time to recoup costs and benefit from a lower rate.
Consider Your Financial Situation and Goals
A lot can change in your financial situation over the lifetime of your mortgage. Refinancing is worth considering if interest rates have dropped significantly since you obtained your original mortgage, allowing you to save money. It may also make sense if your needs or goals have changed.
Lower Interest Rate
If interest rates have decreased by at least 1% since you got your mortgage, refinancing could save you thousands over the remaining life of the loan. For example, if you owe $200,000 on your mortgage and refinance at a rate 1% lower, you could save over $20,000 in interest charges. The savings in interest may outweigh the fees to refinance, making it worthwhile.
Change in Needs
Maybe when you first bought your home, you needed a large mortgage to afford the down payment. Now that you have more equity built up, you may want to refinance to a shorter-term loan, like going from a 30-year to 15-year mortgage. Your payments will be higher but you’ll pay the loan off sooner and save on interest. Or perhaps you need to lower your payments to free up cash for other financial priorities. Refinancing to a longer-term mortgage or taking out cash in the refinance are options.
Improve Your Financial Situation
If your credit score has improved significantly since obtaining your original mortgage, you may now qualify for a lower interest rate. Refinancing could lower your rate and monthly payment. You’ll also be able to drop private mortgage insurance (PMI) once you have 20% equity in the home. This can save hundreds per month.
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Tips for Getting the Best Refinance Rate
Here are some tips to keep in mind:
1. Check your credit score
Your credit score is one of the biggest factors determining your interest rate. Check your score and credit report for any errors before applying. You need a score of at least 620 to qualify for a refinance, but aim for 700 or higher to get the best rates.
Pay down your credit card debt if you can and avoid applying for any new credit during the refinance process. Both of these actions can lower your score.
2. Compare offers from multiple lenders
Apply to at least 3-5 lenders so you can compare offers and rates. Online lenders like Quicken Loans, loanDepot, and New American Funding offer competitive rates. Don’t assume your current lender will offer the best deal.
3. Consider shorter loan terms
If you can afford higher payments, refinancing into a shorter-term loan (like 15 years instead of 30) can save you money over time. You’ll pay the loan off faster and pay less interest overall.
4. Adjustable or fixed rate?
Choose between an adjustable rate mortgage (ARM) or fixed-rate mortgage. ARMs often start with a lower rate but the rate and payment can increase a lot over time. A fixed-rate loan provides payment stability but often a higher initial rate.
5. Negotiate the best offer
Once you receive offers, contact the lenders and let them know you have other estimates to see if they’ll lower their rates or fees. Get everything in writing before proceeding with an application.
Conclusion
With some research and persistence, you can find a refinance offer that significantly lowers your current rate and monthly payment. Keep hunting for the deal that suits your needs and will save you the most money.
emmanuel
