Mortgage refinancing can paint a very different picture for your budget and equity building. Refinancing doesn’t come without an additional price tag but, with the payback period calculated, you could be just a few months away from reaping the benefits of refinancing.
Most borrowers choose to refinance to save money on either their monthly payment when they refinance to a lower or fixed interest rate but keep the same mortgage term and amortization schedule. Not only can you lower your monthly payment but you can also save on interest long term.
It is not unusual to pay 3-6% of your outstanding principal in refinancing fees (Federal Reserve).
Let’s first go over typical closing costs associated with refinancing:
Loan origination fee is fairly straightforward. These are costs that a borrower pays for any type of loan, so they are not unique to refinancing. This covers the processing costs and underwriting cost if necessary and preparation fees from the lender.
Loan Discount Fee can be confusing. The loan discount fee is what many refer to as “points”. A point is equal to 1% of the amount of your loan amount and is what can be paid to lower your interest rate. Each discount point that is paid typically will lower your rate between .0125 – .025 percent depending on the lender. You can ask your lender for the interest rates for with paying points and not paying points, most offer both options. When choosing to purchase discount points, it is important to know where your breakeven point is. Find out what the payment difference is between the interest rate with and without, and then divide the savings by the cost. This will show you how many months it will take to breakeven.
Refinancing doesn’t only mean lowering your interest rates. Sometimes borrowers refinance to change their loan term to a shorter period – most commonly switching from a 30-year mortgage to a 15-year mortgage. A shorter mortgage will ultimately increase in monthly payments, which might tighten up a budget but the payoff comes in less interest paid and more equity that is built up faster. If you find yourself in a situation where you can afford to put more money towards your mortgage payment, refinancing to a shorter term may be a wise choice.
Refinancing means you’re starting to shop for a mortgage all over again. These fees associated with refinancing should be taken into consideration when you’re shopping and starting to calculate your break-even period on the loan.
So where do you even start to organize your calculations on your breakeven period? At the bottom of this article, we’ve supplied you with a PDF worksheet to estimate the point in time where you will start saving money on your home and the point in which you will be building equity faster.
If you have questions about your refinancing, come see an FNB Fox Valley mortgage lender. Get your Refinancing Break-Even Worksheet here.