Should You Refinance? 3 Factors to Consider When Deciding

Refinancing your mortgage can offer you many perks, including a lower monthly payment or a shorter loan term. However, if you find out you qualify to refinance your mortgage, and you probably will, it still may not be the right option for you. Consider these 3 factors when asking: Should you refinance?

1. Consider the costs

When deciding whether to refinance you need to add up all the costs. This includes the cost of an appraisal, application fee, origination fees, etc. It’s possible not every one of these costs would be applied to your refinancing situation, but it’s a good idea to estimate how much it’ll cost you to complete the refinance. Many people overlook the total cost and solely focus on the monthly savings.

2. Calculate monthly savings

Next you need to calculate how much your monthly payments will decrease if you refinance. You can figure this out by looking at your current loan information, calculating your proposed loan information, and then comparing the two numbers.

3. Determine the break-even point 

Once you know your new monthly payment amount you’ll need to calculate what your break-even point will be. Figure out exactly how much it’ll cost to refinance your mortgage by determining your closing costs. Next divide your monthly savings by the cost of the refinance to calculate how long it’ll take you to reach your break-even point. For example, if your monthly savings will be $230 and your closing costs will be $2500, you’ll need approximately 11 months to break even.

Should you or shouldn’t you?

If you’re going to be in your home longer than your break-even point and your monthly savings are significant, refinancing may be the right option for you. When your monthly savings don’t outweigh the cost of refinancing, then it’s probably not right for you unless you just want to shorten your loan term and save on the money you pay in interest during the life of your loan. Another way to save money during your current loan term without refinancing is to put more money towards your principal every month.

What other factors did you consider when refinancing?