I'm sure you've heard the news as of late that once again, mortgage rates are at historic lows. In conversations with all of the mortgage brokers we work with they all say the same thing, “We are insanely busy with refinances”. So if you haven't already done so, is it worth refinancing?
The answer to this comes down to Three Important Questions:
What is the difference between your current rate and the new rate?
How much will the refinance cost?
How long do you plan to stay in your current home?
Let's look at this simple example: Say you are currently paying 4.25%, 4 years in on a $300,000, 30 year mortgage. The current rates on a standard rate term refinance if you have a 740 or higher credit score, are around 2.75%. With these numbers, this is what you would be looking at:
Current Balance 4 years in would be $278,416.09 assuming you have not made extra payments.
Approximate cost to refinance is around $3,200 so your refinance amount would be $281,616.09.
Your current mortgage payment would be $1,475.82 and your new payment would be $1,149.67 a savings of $326.15/month.
If we divide the cost of the refinance by the savings, you get 9.8 months to recoup your costs with the savings.
So with this scenario, as long as you plan on staying put for at least 10 months it would be worth refinancing. Now, lets say you have a little better current rate like 3.25%. In this case your savings is only $170.87 and your months to break even goes up to 18.7 months. Still not bad but if you are thinking of moving in the next 2 years it may not be worth the time.
The other factor that may play a significant role in your decision is how much you owe. If we change the example so you only owe $170,000, because the cost to refinance doesn’t change much your months to break even goes up to 35.1 months, which means you need to commit to at least 3 years in the home.
In the end, interest rates are very low and refinancing may be a great option depending on your specific numbers.
Not so sure how to calculate the numbers? Give us a call, we can get you started and have some great resources to help you decide if now is the time to refinance.