Does a mortgage refinance make sense? The answer to that common refinance question largely depends on your goals for your new mortgage and how long you plan to stay in your home. Indeed, there are several benefits to refinancing:
You can lower your monthly payment by taking advantage of lower mortgage rates
You can choose a different loan product
You can combine two mortgages into one
You can pay off your mortgage more quickly
Whether you are choosing to refinance to a record low mortgage rates to lower your monthly payments or you're refinancing from an ARM to a fixed rate, each refinance decision comes with its own set of questions and considerations. Here are eight answers to some of the most common refinance questions:
No. 1: Will my refinance save me money?
Regardless of why you're considering a refinance, it's important to calculate all of the costs and potential savings before making a decision to determine if the refinance will actually save you money. Refinance savings go beyond the break-even point to where you begin to save actual dollars on your refinance. If you're planning to sell your home within a few years, it may not give you enough time to break even on a refinance. Breaking even requires making enough payments at the lower payment to save more than the cost of refinancing. It may be possible to refinance with no out-of-pocket costs, however, there is no break-even point since the refinance cost you nothing out of pocket. That said, there will be a smaller reduction in your monthly payment since that “no-cost” refinance comes with a higher interest rate or larger loan balance. To calculate if and when your refinance will save you money, utilize HSH.com's refinance calculator. The calculator gives you the simple "break-even" calculation so that you know how long it takes to recoup your refinance costs, but it also provides additional information about how your total interest cost and loan balance will differ when you choose to refinance with either a traditional refinance, low-cash-out refinance or a cash-out refinance. Examining the affect on your interest costs and loan balance is the best way to determine if a refinance will be beneficial to you over the long term.
No.2: Will a lower rate alone save me money?
Loan officers may provide you with a false sense of security by calculating your new payment if they simply subtract it from your current monthly payment and call that difference "savings." But that figure isn't exactly correct in terms of your actual savings.