Post by Jack

Just when we think mortgage interest rates can’t go any lower, they drop lower.  Watching others sign mortgages for one or two percent less in interest than you pay can be frustrating.  Each extra percent of interest you pay may feel like money slipping through your fingers.  You may wonder, should I refinance my homeloan?  Is it worth the additional fees?

Here are some details to consider before you even begin the refinance process:

  1. How much will you pay in fees?  There are often many fees associated with refinancing.  These fees vary by state, buy you can expect to pay fees for underwriting, title search, title insurance, and title endorsements, just to name a few.  You can expect to pay several thousand dollars to refinance your home.
  2. How much will you save each month?  If you refinance, your lower interest rate will likely lead to a lower monthly payment.  (A home loan calculator can help you determine how much lower your monthly payment will be.)
  3. How long do you plan to stay in your house?  One key factor in the decision to refinance is how long you plan to stay in your home.  If you decide to refinance, let’s say it will cost you $3,800 in fees, and you will save $152 a month on your payment.  Simple mathematics will show you that if you stay in your house less than 25 months, the amount you save monthly will not be offset by the fees you had to pay to refinance.  If you stay 25 months, you will break even.  In this example, any time you stay in your home longer than 25 months will result in savings.  If you end up staying in your home for 10 years after you refinance, you will have saved $18,400 in return for paying $3,800 to refinance.  That is a refinance well worth it.

If you do determine a mortgage refinance is worthwhile in your situation, the next step is to determine what you will do with the extra money every month.  One of the worst things you could do is simply absorb that money back into your regular budget.  Instead, make that money work for you.

Consider applying your old payment to your mortgage every month.  If you reduce your payment by $152 a month, think about how much faster you could pay off the mortgage if you put that extra money on your principal.  You would be paying an extra $1,824 a year, which over time could shave several months, if not a year or two, off your mortgage and save you thousands in interest over the life of the loan.

Use the money to pay down other consumer debt.  If you have other debt besides your mortgage, an extra $152 or more a month could help you get out of debt faster.  Once you are out of debt except for the mortgage, you would have even more money available to earmark for specific purposes.

Use the money to invest.  You could use the additional money to begin to save to invest in property or to invest in the stock market or your retirement.  An extra hundred or two hundred may not seem like much, but over time, if you earmark it for a specific purpose such as investing, that money will grow and help you obtain a much more secure financial position.

Refinancing isn’t always the best option, but for many who took out loans in the last five years or more, refinancing may save a significant amount of money.  Some may think refinancing is a hassle, and it may be, but it is well worth the hassle to save thousands of dollars over the life of your mortgage.  However, before you decide, do the math and make sure your lender has disclosed all of the fees upfront so you can make the most informed decision for your own unique situation.