Saving Money and Mortgage Refinancing: How to Accomplish Both

Reduced mortgage costs can house big savings. To accomplish this goal, many homeowners choose to refinance their existing loan. Borrowers with equity and good credit benefit from this option by locking in a better interest rate and lowering their monthly payments. Sounds perfect, right? –Well, usually. Before diving in to a refinance deal, consider the factors below to ensure maximum savings. Despite its name, not every refinance guarantees a positive outcome.

• Factor #1: Net savings. In order to secure a beneficial loan, it is important to calculate the net savings. This number compares the cost of the original mortgage to the terms of the new mortgage. In order to save, the new mortgage costs must be less. Ask your mortgage broker to calculate your net savings by adding up the following:
  
  
  • Principal loan amount
  • Interest rate
  • Points and fees incurred during the refinancing process
  • Tax savings on interest and fees
  • Factor #2: The “Break Even” Period. Even if your new mortgage terms are better, determining the “break even” period is a vital consideration. This factor analyzes how long it will take to save money after covering the refinancing costs. If you intend to stay in your home for a lengthy period, refinancing may be worth it However, if you intend to sell your home immediately, paying to refinance beforehand could result in a less-than-desirable savings model. Consider your family’s living situation and future goals before saying yes to a refinancing option. Will the new terms pay off in six months, or will it take years to recoup the up-front expenses? How will the loss in income affect your short-term situation? Assessing these risks is imperative.
  • Factor #3: Loan Length. If your existing loan is nearing its end, the cost of refinancing may not exceed the benefits. Consider the following example:

Mr. and Mrs. Davis have five years remaining on their 30-year fixed loan. The bank recently contacted them and offered to refinance their mortgage at a much lower interest rate. Although the new rate is tempting, the Davis’ understand that refinancing would also reset their mortgage term to 30 years. While their payments would be lower, the longer term and accruing interest would undoubtedly overshadow the short-term savings.

Sometimes paying a higher, short-term price is preferable to lower, long-term payments. Do the math and consider the overall savings rather than the immediate perks. Proper planning could save you thousands in the long run