When Is Refinancing Your Home Loan Right For You?

Why are you refinancing?

Are you trying to save money on interest, get out of onerous loan provisions, or are you simply trying to stay in your home with a lower monthly payment? Identifying your goals at the start will help you make a plan that meets your needs. How does the new home loan compare to my current one? Consider refinancing if you are currently in a mortgage with highly unfavorable requirements (i.e., adjustable-rate mortgages, interest-only mortgages, piggyback mortgages, or balloon mortgages). Even if the monthly savings aren’t huge, getting out of a bad mortgage can be worth it in the long run.

Is there a prepayment penalty on your existing mortgage? Some lenders impose a penalty for paying off your mortgage in advance. It doesn’t rule out refinancing, but it’s an important item to consider when evaluating options.

How much equity do you have in your home? You’ll need at least 20% equity to avoid paying private mortgage insurance (PMI). PMI charges on a new loan could erase any savings you might see from refinancing.

How much are closing costs on the new loan? Average closing costs on a $250,000 mortgage are almost $3,000, so it’s important to know this figure up front when accounting for the cost of a refinance.

What will your monthly savings be? This answer is crucial if your goal refinancing is to make your mortgage payments more affordable. However, if you want to save on interest charges, monthly savings alone don’t accurately reflect long-term refinancing costs.

What is your break-even point? Your break-even point is the minimum length of time you should plan to stay in your home for a refinance to make sense.

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How long will you stay in your home? Experts usually advise refinancing only if you plan to stay in your home at least five years. Multiply your amount you would save per month with a refinance by the number of months you plan to stay in the home. If the total is significantly higher than the closing costs of a refinance, refinancing could be a good option.

What is the total savings over the lifetime of the loan? This figure gives the most accurate view of the long-term costs and savings by accounting for your answers to the previous questions. Use a refinance calculator to determine your long-term savings.

 

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