Refinancing your mortgage. Can you really save money?
Well, there you are with a loan secured on your home. Every month, you pay the instalment out of your income. What’s the problem? Why should you want to refinance? For most, it could not be more simple. Because you want to pay a lower monthly instalment! When prices for all the basic necessities of life keep going up but your income fails to keep pace, you get squeezed. Let’s think about how you came to be in this position.
Perhaps you bought your home when the interest rates were high and you were locked into that higher rate. Even though the Fed kept dropping the rates over the last few years, you never saw any savings. Or perhaps it’s the other way round. The reason you were locked into a higher rate of interest was a poor credit score. Now you’ve been paying that mortgage for all these years without a problem, your credit score has improved. Finally, you’re able to qualify for lower mortgage rates.
Except that life is never quite that simple. It’s all about balancing costs and benefits. Sure, you might be able to save a few dollars every month if you refinance. But how much will you have to pay as origination fees and charges for this deal? When you get quotes for refinancing, don’t focus on the monthly instalments, look at those costs. Just as important, ask your current mortgage lender about closing costs. Don’t forget, the plan is to pay off the existing mortgage with a new loan. You need to use a mortgage refinance calculator to work out how many months on reduced payments it’s going to take before you’re ahead of the game again. It might be better to stay on the current mortgage. Most of the experts agree you should be looking for at least two full percentage points of reduction in the interest rates before it’s worth your while to go ahead on the deal. You also need tax advice because closing costs are not deductible but there may be tax savings on the new loan.