Could Refinancing Lower Your Payments?
Let’s say you bought your home five years ago with a loan amount of $150,000. Now, after five years, your circumstances have changed and you’re looking to lower your monthly mortgage payment. Can refinancing help?
In this situation let’s assume that after five years of payments your current mortgage balance is $140,000 and that interest rates have dropped by .05% (or your credit has improved, allowing you to qualify for a lower rate). Here’s the scenario:
Existing loan amount: $150,000
Existing interest rate: 6.50%
Existing mortgage term and type: 30-year fixed
Current monthly payment: $950
Refinanced loan amount: $140,000
New interest rate: 6.0%
Refinanced term and type: 30-year fixed
New monthly payment: $840
So by refinancing to a 6.0% interest rate your payment could drop from $950 to $840. But there’s one more calculation to do: because of the cost involved in refinancing – three to six percent of your loan amount – you’ll want to find out when you will break even. To do so, you can divide the cost of refinancing by your monthly savings. Let’s say closing costs are three percent of your new loan amount of $140,000, or $4,200.
Cost to refinance: $4,200
Monthly savings: $110
Months to break even: 38
In this scenario, if you are going to be in your home for less than four more years, it may not make sense to refinance under these terms.
GetSmart makes it easy to crunch the numbers for your specific situation. Simply visit our refinance calculator and find out if refinancing can lower your monthly mortgage payment.
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