If you’re a homeowner, you probably receive periodic e-mails or mailers touting the benefits of refinancing. Even if your mortgage payment fits comfortably in your budget, these communications may leave you asking an important question: How much will refinancing save me? The answer to that query depends on your circumstances and the choices that you make.
How Much Will Refinancing Save Me?
Would a lengthy ride in a small elevator with a rabid skunk be a pleasant experience? With some questions, the answer is obvious. For others, offering a clear response is trickier. For example: How much will refinancing save me? To determine the answer to this question, you’ll need to start by looking at the factors involved that may result in savings.
How Refinancing Can Save You Money
According to Credit.com, there are many areas where refinancing might save you money:
- Interest Rate: Where are interest rates in comparison to your current loan’s interest rate? Securing a lower interest rate means that you pay less to borrow money. In fact, a drop in your interest rate can provide savings on both your monthly mortgage payment and your total loan cost.
- Loan Type: With an adjustable-rate mortgage, the loan’s interest rate changes, which is handy when interest rates are dropping but unnerving when they are rising. A fixed-rate mortgage has a set interest rate. It depends on the financial markets and your personal circumstances, but switching from one loan type to the other may result in savings.
- Private Mortgage Insurance (PMI): The homeowner pays PMI, but it benefits the lender by protecting them in the event of a default. It’s generally required when your down payment is less than 20 percent. While some loans automatically stop PMI when the loan-to-value ratio reaches 78 percent, others continue unless you refinance. Alternately, refinancing may allow you to escape paying PMI sooner than expected if your home has risen in value, giving you more equity.
- Loan Term: Stretching a loan out over a longer term generally results in paying more interest over the life of the loan. When you refinance to shorten the term of your mortgage, your monthly payment may drop, hold steady, or increase, but the overall cost of your loan generally drops.
- Debt Consolidation: Mortgages tend to charge lower interest rates than credit cards and many other forms of financing. Refinancing to gain access to your equity provides an opportunity to consolidate debts at an interest rate that is more affordable.
While refinancing can present many opportunities for savings, it does not always save you money. As Investopedia explains, a variety of factors can come into play. In addition to all the factors listed above, it’s important to consider the cost of refinancing, which generally runs between 3 and 6 percent of the loan’s principal. Next, how long do you plan to keep the home? The longer you stay in the home, the more time that you’ll have to recoup any costs and reap any savings from refinancing. Finally, what’s your credit score? Your credit score may impact your loan terms, potentially increasing the likelihood of savings.
How do you know if it’s time to take a serious look at refinancing? Credit Karma advises that it’s worth considering refinancing if your credit has improved, mortgage rates have dropped, or your home’s value has increased substantially.
How to Determine If Refinancing Will Save You Money
How can you find out if refinancing is likely to save you cash? Money Under 30 explains what’s involved in crunching the numbers. The first step is determining what refinancing will cost by adding closing costs and any fees that you’ll incur. Next, calculate how much your monthly mortgage payment will drop if you refinance. Divide the total cost of the refinance by your monthly savings to determine how many months it will take to recoup the cost of refinancing. If you plan to remain in the home longer than that, then you can expect to see savings.
Are your math skills a little rusty? A refinance calculator can make it easy to find out how much you might save by refinancing.
When you’re ready to explore the opportunities that refinancing can offer, reach out to the loan experts at PrimeLending Twin Cities. We continually strive to make the process of attaining financing as simple and pleasant as possible. That’s why we offer personal attention, effective communication, and transparency as we work to help you achieve your housing goals. With a wide range of loan products available and full understanding of the local market, we’re ready to assist you. Contact us today to learn more about our services or schedule an appointment.