There have been record numbers of refinance transactions in the past year because of interest rates that are hovering near historic lows. When taking advantage of low interest rates, there are two approaches to saving money; refinancing with the goal of paying your mortgage off as quickly as possible, or of having the lowest payment possible. In both scenarios, if you can save at least one percentage point on the interest rate, it probably makes sense to refinance.

                The first question to ask yourself is how soon will your monthly savings recoup the closing costs of refinancing your mortgage? For example, if your estimated closing costs are $3,000, and you save $100 per month, it will take two and a half years for your monthly savings to equal your closing costs. Once you know how long it will take to recoup those closing costs, you can consider how long you plan to live in the house to find out the total amount of money you would save. In the previous example, if you lived in the home for 10 more years, you would receive a net savings of $9,000 if you refinanced. This number was calculated by multiplying your monthly savings of $100 by 120 months to get the total savings of $12,000. Then, you simply subtract the closing costs of the mortgage of $3,000 to get the final net savings of $9,000.

                This method is a simple way to determine if it makes sense to refinance. If you refinanced from a 30 year to a 15 year, or if you have paid down your mortgage considerably, a more thorough analysis would be necessary to see if refinancing would fit your goals. For example, if you had already paid for 10 years on a 30 year mortgage, refinancing into a new 30 year mortgage would extend your term back out another 30 years. Although your monthly payment would be lower, you would be paying less towards the principal balance of the loan. In cases like this, it is important to understand how much of your payment goes towards principal and how you pay in monthly interest.  

                In any situation, it is always best to review your options with a trusted, honest, and local mortgage broker. Because we work with over a dozen mortgage lenders, we are able to set up our clients with the best mortgage programs at the best mortgage rates. Our Greenville office is located right off of I-85 on Pelham Road. Set up an appointment with me today, I can offer a free credit review and mortgage consultation.



 




Adam Groblewski