What Is Mortgage Refinancing and When Does It Actually Save You Money?
4. In what situations might you save money by refinancing?
It’s not always the greatest option to refinance. Only under certain conditions can it save you money.
A. Obtaining a Reduced Interest Rate
Over time, even a 0.5% interest rate reduction can result in significant savings.
For instance:
$300,000 original loan at 6% interest = $1,896 per month
5.0% refinance = $1,610 per month
Savings: $3,432 year or $286 each month
After refinancing, always check your total loan costs to make sure you’re saving money.
B. There are up-front expenses associated with refinancing when you intend to remain in the house for a long time. The break-even point is the amount of time you must remain in the house in order to recover those expenses.
For instance:
Cost of refinance: $5,000
Savings per month: $250
20 months to break even
Refinancing could be more expensive than it is beneficial if you want to move before then.
C. If You’d Like to Pay Off Your Mortgage More Quickly
Although your monthly payments may go up, you can save tens of thousands of dollars in interest by moving from a 30-year loan to a 15- or 20-year loan.
This works best if
Your income is steady.
Your goal is to lower the overall cost of the loan.
You intend to remain in your house for a long time.
D. When to Make Strategic Use of a Cash-Out Refinance
A cash-out refinance may be a wise financial choice if you use it to settle high-interest credit card debt or to fund upgrades to your house that will increase its worth.
But exercise caution. You are converting unsecured debt into a home-secured loan.
