Refinancing your mortgage can save you thousands of dollars if you do it right.
There are several different reasons why you may be considering refinancing your mortgage. The most popular reason is to get a lower interest rate, but you may also be looking to decrease your monthly payment, get cash out of your home, change the term of your mortgage, or move between a variable and fixed interest rate.
How to refinance the right way
Refinancing your mortgage can save you money, but only if you do it right. Refinancing for the wrong reasons, like to extend the term or take cash out, can end up costing you more in the long run. There are a few different paths to refinancing your mortgage the right way.
1. The Lazy Way
The lazy way to refinance your mortgage is by checking with your existing lender and asking for a better rate. If they fear you might look for a different lender if they don’t give you better terms, you might get a new rate without having to go through a traditional refinance.
2. The Easy Way
To get an idea of whether or not it makes sense for you to refinance, simply multiply the difference in interest rates by your outstanding loan balance to determine the annual interest savings. For example, if you are considering refinancing from a 4.00% rate to a 3.50% rate and have an outstanding balance of $200,000, you could expect to save about $1,000 per year. If the total cost to refinance was $2,000, it would be two years before you could expect to breakeven.
3. The Money Guy Way
To know exactly how much you could expect to save by refinancing and when you can expect to breakeven, you’ll need to run an amortization calculation on the current mortgage and the old mortgage. Remember to use the old payment for the new mortgage to see how much you could truly save, and don’t forget to account for closing costs.
We discuss everything you need to know before you refinance your mortgage, and how to know if you are making the right decision, in this episode of The Money Guy Show: