The trick to determining whether or not it is worth it to refinance is to first ask yourself how long you intend to stay in the home. Though it is not always possible to answer the question, it provides a guideline for making an accurate refinance calculation. The most simple calculation is to take your current payment and subtract it from the payment you will have if you refinance. You may end up saving $150 month. Next, take the “total cost” of the loan and divide it by the monthly savings. Assume the loan costs $5000 to refinance and the savings will be $150 per month. 5000/150 = 33 months. In this scenario it will take 33 months or almost 3 years to recover the cost of the refinance. If you are going to be in the house for 7 years, most likely the refinance will be worth it.
There are quite a few other factors to consider. For one, if the loan you are refinancing is an older loan and has been paid down significantly, you may be paying a significant amount of principal every month. If you “reset” the loan to start over at 30 years, because of the interest curve, you will be paying much more interest than principal all over again. This is usually not worth it.
Another reason to refinance could be that you want to get out of an interest-only loan. In these circumstances, depending on where the market is heading, you might not even be saving any money by refinancing. You will, however, be paying a portion of principal every month and further the loan will never adjust to market rates as do interest-only loans after a certain period of time. The same goes for an ARM mortgage. Nobody wants an ARM when the market’s interest rates are going up quickly.
Colorado lenders will provide a free refinance analysis for clients.
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