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It takes a bit of time now to refinance your home mortgage and I’m not suggesting that it’s not a good idea to lower your monthly payment but there are several other considerations before you move down this path.
First, how long are you planning to stay in your house and second, what costs will you pay up front? The reason I mention this is if the payback time is 36 months but you move in less time then you haven’t recouped the costs. So how do you figure this out. Well…I’m going to give you a hypothetical situation to help you analyze this step-by-step.
Here are the factors you’ll need to know to solve the math:
- upfront closing costs (appraisal, lending fee, etc. which must be provided to you by the lender)
- current monthly mortgage payment (you already have this)
- refinanced monthly mortgage payment amount (provided by lender as part of the process)
- how long (in months) do you plan to remain in your home
Let’s assume the following factors:
- upfront closing costs of $5,000.00 (this will vary based on what lender requires)
- current monthly mortgage payment of $1,500.00 (principle and interest only)
- refinanced monthly mortgage payment amount of $1,350.00 (principle and interest only)
- you plan on remaining in your home for at least 36 months
Now, here’s how you solve the math. Divide the upfront closing cost ($5,000.00) by the difference between the two monthly payments ($150.00) which is 33.3 months. This means you’ll need to remain in your home for 34 months to break even.
That’s how you do it.
