This page is to serve as a guide to answer the question “Should I refinance my mortgage” and help you determine the true financial benefit of a rate-and-term refinance (i.e. a refinance that either lowers your mortgage interest rate or changes the term of your mortgage). If you ultimately want us to do the work (and we are happy to since that’s our job) then just complete the Refinance Analysis Questionnaire (OR just send us your mortgage statement) and we’ll call you to discuss the different types of mortgage refinancing: like “no cost” vs. “low costs” and outline all the Refinance Costs that may or may not be incurred. That’s what makes us one of the best mortgage lender in Dallas, Texas. #Modest
What To Compare
To answer the question “does a mortgage refinance makes sense?” you need to compare apples to apples by contrasting your current mortgage to that of a potential refinance. A side-by-side loan comparison will convey the potential monthly cash flow, the annual interest savings, and the break-even periods to help determine how long before the savings will justify the costs. Feel free to use our Mortgage Payment Calculators to recreate your current mortgage and compare it to a potential new loan. Obviously feel free to call us if you have any questions (or just want us to double check your work).
Payment Comparisons
We will only be comparing your current Principal and Interest (P&I) and Mortgage Insurance (MI) payments to that of the proposed loan’s P&I and MI. The reason why is because your property taxes and homeowner’s insurance won’t change with a refinance so we don’t need to involve those numbers. Therefore, if you’re using a mortgage calculator (like ours), we recommend you put ZERO in for the taxes and insurance to simplify the comparison.
Costs vs. Prepaids
Let’s also define the “costs” for a loan. When you refinance there are two components to closing: the actual fees for the loan (i.e. the Refinance Closing Costs) and the applicable prepaids (i.e. per diem interest, the escrow account, and any taxes and insurance that may be due). What you need to review is the closing costs because the prepaids will exist regardless. In other words, even if you don’t refinance you still owe your property taxes, homeowner’s insurance, etc.. So put the prepaids on the back-burner since taxes and insurance will be paid regardless if you refinance. (You may want to check out our page on Prepaids and Escrows for Refinances to learn what happens when you refinance and have a current escrow account).
How Much Can I Save?
How much you “save” when refinancing is a bit of a trick question. Here’s why: cash flow, meaning the money amount you reduce your payment is important; however, it’s not the factor and may not truly be “savings”. You need to consider other components like the interest savings and costs.
Cash Flow “Savings” vs. Interest Savings
If refinancing lowers your monthly payment it doesn’t necessarily mean that you’re “saving” money. That’s where the calculators come in to play. While the monthly cash flow may be welcomed, let’s not forget that much of this “found” money could be from the clock getting reset on the loan and resetting the term. That said “resetting the clock” (i.e. refinancing to a period longer than what you owe now, like going back to a 30-year loan) is not a bad thing – we just need to make sure we know numbers to ensure it’s the right decision for you.
Break-Even Periods
The real question to ask is: “when does the refinance savings justify the cost?” Knowing this will ultimately provide you with the information need to know if you should refinance your mortgage.
Cash Flow Break-Even Period
The amount that your payment is lowered is the monthly “cash flow savings”. To determine the break-even period based on this cash flow is to take the total costs and divided it by the annual cash flow savings. For a true “no cost” loan where nothing is rolled into the loan and zero costs are paid at closing, the break-even period is instant since you didn’t pay anything for the loan. Conversly, if you’re paying a bunch of costs and points to get the lowest and best interest rate to save the most money over time, the break-even period will be extended due to the higher costs.
Costs Break-Even Period
To determine the actual interest savings we need to compare the difference paid in interest (and MI) on your current loan versus that of the new loan. THEN we’ll determine how long it will take for these savings to justify the costs spent. As stated before, if the costs for the refinance is minimal (or zero) then any amount of savings will realized almost instantly since the costs were nominal.
Breaking Even: When Does It Make Sense
Once you know the break-even periods you then get to determine if you think it’s worth refinancing. The real question we ask is: “how long do you expect to have the new mortgage?” Example: if the break-even period on the new loan is three years but your plan is to sell the home in two years then it’s not worth the costs to refinance; HOWEVER, what if your plans change and you don’t sell in two years, then is worth the refinance? You need to use your crystal ball to determine what’s right for you. And as always, you’re welcome to call us for a opinion – we can assure you that we’ll point you in the right direction. While we get paid to close loans, we’re in business to do the right thing and provide prudent counsel.
Examples
If your loan amount is around $125,000 or lower, it often becomes difficult to justify the rate and term refinance if there’s isn’t a significance improvement in rate. The reason is because even if the rate is lowered by a full point, the loan amount is so small that the change in payment may not be enough to justify the costs that may be associated with the loan. For the smaller loan amount a “no cost” loan would be more ideal. Conversly, for larger loan amounts, like $400,000, the drop in rates does not need to be as significant for the savings to justify the costs. Even a .25% lower rate on a $400,000 loan could mean substantial savings over the life of the loan.
Mark Pfeiffer
Branch Manager
Loan Officer, NMLS # 729612
972.829.8639
MortgageMark@MortgageMark.com
We assist clients with all type of mortgage loan programs