If you have a mortgage with an interest rate that is higher than the current rates offered you may want to refinance your mortgage loan. The lower interest rate will give you lower monthly payments. You have to understand that when you refinance you will pay closing costs on the loan again. This means that you should know how much savings will be generated when you refinance versus the amount you will invest in the refinance loan. This period of time is known as the refinancing payback period. You need to know the closing costs on the new loan and the amount of savings on your monthly mortgage payment in order to calculate this figure. The steps are relatively easily followed. Find your calculator and let’s get started.
Step 1: Call different lenders and tell them how much you want to refinance. Look at your current mortgage statement to find the current principal balance or the ‘pay off’ amount on your note. Your lender will give you a rough estimate of the costs of the refinance when you call.
Step 2: Find the monthly payment savings. You will need to get your current mortgage payment amount from your mortgage statement. Compare that to the new monthly mortgage rate the lender estimated on the new interest loan. Here’s an example: Your current mortgage payment is $2,310. The quote from the lender on the new note is $2,275. $2,310 – $2,275 = $35. Your monthly savings would be $35 per month.
Step 3: Now you need to get the figure the lender quoted for closing costs on the new loan. How many months will you need to pay before you realize the return investment on these closing costs? Here’s an example for you: Your monthly savings is $35. The closing costs quoted are $2,130. $2,130/35 = 60.86. Round up the answer, 60.86 to 61. This calculation shows that it will take you 61 months to earn back the amount you invested in refinancing the mortgage. With 12 months in the year, it will take you a little over five years to recoup your investment.
It’s decision time for you now. Will the refinance with the lower interest rates be beneficial to you? If you have more than five years to pay on your original mortgage loan it would be in your interests to invest the money to refinance your home. If you owe less than five years it would be a draw. Keep your mortgage loan and pay it off without refinancing.