When a Refi Makes Sense
In our post 4 Ways to Make Refinancing Work for YOU!, we explain how you as a homeowner can take advantage of refinancing opportunities. From lowering your monthly payments to paying less interest, there are a number of reasons why it’s smart to refinance. However, that still leaves the question of when to refinance. In this post we’ll go over how to know the right time to start on refinancing your mortgage!
The best way to determine whether or not it’s time to refinance is to do some quick math. While refinancing at a lower rate can certainly save money over time, there are still fees associated with completing the process. So, we can illustrate the payback period with a quick equation like this:
(Fees associated with refinancing)/(Expected monthly savings) = Number of months to payback
In the equation above there are three components:
Fees associated with refinancing: When refinancing, there are a number of costs that need to be covered ranging from inspection and appraisal, to application and closing fees.
Expected monthly savings: This one is more or less self-explanatory. This is the difference between your current monthly payment and your monthly payment at the new, lower interest rate.
Number of months to payback: This is the number of months you’ll need to keep the home to break even on the refi. If you don’t expect to be there longer than it takes to offset the cost of the refi, you’ll be wasting time and money, even at a lower interest rate!