Changing your mortgage can be a daunting task. However, when mortgage rates are falling, the cost savings that one can achieve through refinancing is such that it’s worth the annoyance of going through the process. If you originally took out a fixed-rate mortgage, you are likely paying a higher interest rate than the current going rate.
Although you incur closing costs, reducing your interest rate by refinancing your mortgage can help you save much more in the long run. You have to look at the costs as an investment into your financial efficiency. The best part about this kind of investment is that the costs and the returns are completely known before you act—in this sense the benefits are virtually guaranteed upon the funding of the new loan.
For example, if lowering your interest rate by 1% would result in a $100 savings on your monthly mortgage bill and your refinance closing costs are $2,000, you would start saving money in about one and a half years. But there is more to it than just dividing the cash flow into the upfront costs. This is a great gauge to use to determine if you should take on such a loan, but it isn’t the whole story.
There are some other costs to refinancing that are harder to see, and these are all related to your equity. The amount of equity you have on your home (how much of it you have paid off) also factors into your new interest rate. The more equity you have, the smaller your new loan from refinancing will be, resulting in a lower mortgage rate.
Another important aspect to remember is that by refinancing, you are taking out a new loan. Therefore, if you take out another 30-year loan, you are effectively pushing back the date you will pay off your home. If you are in the right position to refinance your home from a 30-year to a 15-year loan, you may be able to avoid prolonging this date.
Starting the term over again also means going back to square one on how the principal and interest gets divided from each payment. Since all fixed rate mortgages are front loaded with interest, this is something to get a handle on before you jump into any new loan.
PDX Home Loan has been using an analysis program to help clients achieve complete cost/savings clarity for more than seven years. If you would like to have your mortgage analyzed for potential efficiency improvement, fill out the rate quote form on our homepage. Once you do this, you’ll receive a total cost analysis report from our team of mortgage experts that looks like this:
So what does this all mean? Refinance your home to save money with a lower mortgage bill every month. It’s a no brainer! In fact, you can celebrate National No Brainer Day, Feb. 27, early by committing to a day of obvious choices, including how refinancing can benefit you in the long term. Contact James Adair to learn how to get started.