The Best Ways To Refinance
People refinance their homes for many different reasons — high-interest debt consolidation, lowering mortgage interest rates, reducing the term of your loan, accessing home equity, and eliminating mortgage insurance often top the list.
Many homeowners overlook some very important factors when determining how long it will take to break even on their refinanced mortgage, focusing too much on the APR being offered by the lender. Using a break-even calculator can help take the guesswork out of what needs to be considered when refinancing your home loan. It’s an important part of due diligence and can save you from making very costly mistakes.
What is Refinancing Your Mortgage?
The concept is quite simple. Refinancing your home loan means you are swapping out your current home loan for another one that better suits your needs. Your new loan will pay off your old one leaving you with more breathing room, lowered monthly payments, and less interest. Before refinancing, it helps to research the types of loans available on the market.
How Does a Refinance Break-Even Calculator Help?
A break-even refinance calculator tells you how long it will take to recoup the closing costs on a refinanced mortgage as well as shows how long it will take you to pay off your loan. If you’ve provided accurate data, a break-even calculator can tell you how much you are saving per month. After calculating your new loan expenses, compare it to your current mortgage to see how much refinancing has saved you.
As any statistician would tell you, the more accurate data that you are able to input into an equation, the more likely you are to have precise information in which to inform your decision.
How to Calculate the Break-Even Point
Determining how long it will take to break even on your refinanced mortgage requires inputting all fees and closing costs. It’s important to keep in mind that some lender fees can be negotiated. Remember that a relationship with a lender is mutualistic — they need you as much as you need them. Once you have your offers and estimates compiled, you may proceed to calculate your break-even point.
- Title Fee. You don’t have to rely on real estate agents to choose a title company for you. You may shop around for the best price. Doing a little due diligence can save you money in the long run.
- Attorney’s Fees. Some — but not all — states require attorneys to review and submit refinancing paperwork on your behalf. Attorney’s fees can vary dramatically from state to state and attorney to attorney.
- Appraisal Fees. Your lender will no doubt require an appraisal of your property before signing off on a loan. Appraisal fees vary from state to state, but it is safe to assume that your fee will land somewhere between $250 and $600.
- Title Search. Even though a title search was more than likely done during your first loan application, your lender will do another title search the second time around to ensure the property has a clean title — no liens, etc.
- Underwriter Fees. The fees that a lending institution charges for taking on the risk of a loan must be factored in.
This is by no means a comprehensive list, as laws and lenders’ refinancing requirements vary wildly from state to state and lender to lender. But if you have researched and compiled all pertinent information, we can move on to finding your break-even point.
What is the Formula for Finding the Break-Even Point?
The formula for finding your refinancing break-even point is actually quite simple. Let us say that you have compiled an exhaustive list of all of your refinancing costs and your grand total comes to $5,000. Next, look at your most recent mortgage statement. Subtract your new monthly mortgage payment from your old monthly mortgage payment. This will tell you how much you have saved by refinancing. Let’s say that by refinancing you have saved $250 per month. Divide your refinancing expenses by your monthly savings, and you get your break-even point. In this case, $5,000 ÷ $250 = 20 months.
While the formula itself is very simple, keeping track of all of the data points needed to refinance your mortgage can be trying. More than anything, a break-even calculator is an organizational tool that can help alleviate some of the stress of refinancing your home.
What Else Should be Considered?
As stated above, there are many different reasons that people refinance their homes. Having a defined view of what your goals and needs are will help make the direction to take your new home loan much easier to see.
An important thing to consider is whether or not you plan to extend or shorten the term of your loan. If your new mortgage is longer than your current mortgage, it is more than likely that you will end up spending much more in interest over the long term. If it is economically feasible, it might be worth it to try for a shorter-term loan. While your immediate out-of-pocket monthly payments may increase, it may be beneficial to avoid paying long-term interest.
There is also the question: Should you refinance? Factors like how long you plan on staying in your home, pay increases, and if you have immediate plans to sell all play a part in determining if refinancing is the right move for you.
How can The Home Loan Expert Help?
We have decades of experience in the mortgage industry and would like to think we have helped take mortgage refinancing out of the hands of faceless lending institutions and placed it in the hands of caring, dedicated professionals.
We will work tirelessly on behalf of our clients to ensure their new mortgage is in keeping with all of their needs and goals.
Chris
