In today’s home financing most people already have a great rate.  When looking to refinance your current loan to save money there are a few things you must know to potentially still save money.

Payback Period

In order to analyze the value of a refinance you must calculate the payback period.  In order to do this you divide the net closing costs by the monthly payment savings, this will tell you how many months you need to save in your payment to make up for the closing costs you pay upfront or finance into the new loan amount.  For example, if the closing costs are $3,000 and the payment savings are $100/month, then the payback period is 30 months.  Normally I recommend avoiding a payback period greater than 42 months and encourage a target of 36 months or less, it rarely makes sense if it takes longer than 3.5 years to refinance.  You can adjust the closing costs by taking a rate slightly higher than the lowest rate and this can dramatically impact your payback period.

Accelerating Payoff of Your Loan

Often my clients may not need a payment savings.  This is usually because they already have a great rate and the rate they would get on a refinance with a short payback period is not great enough to to be meaningful.  In this case I always suggest looking a new loan with shorter payback period.  For example, say you have made 36 payments on your current 30 year loan, meaning you have 27 years of payments remaining.  In this situation, I look at how many months you can cut off your loan by reducing your rate, but paying the same payment as you pay now.  Often we can find ways to cut 4-10 years off the current mortgage with this strategy.

Refinancing Bottom Line

My recommendation is to periodically have a mortgage review to see if there is a chance to reduce your payment with a lower rate or reduce the number of payments to make on your loan.

Tim Swierczek, MMS

NMLS# 103522

Tim Swierczek Zillow 5 Star Lender

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Click here for our Down Payment Assistance Finder!  
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