Calculate the total fees and closing costs of your new mortgage loan and divide it by your monthly after-tax savings to determine the number of months it will take to recover the costs of refinancing your mortgage-the break-even point.įor example, if you’re refinancing a $300,000, 20-year, fixed-rate mortgage at 6% with a new 4% interest rate, refinancing will reduce your original monthly mortgage payment from $2,149.29 to $1,817.94-yielding a monthly savings of $331.35.Multiply your monthly savings by your after-tax rate to obtain your after-tax savings.Determine your tax rate, then subtract it from 1 to determine your after-tax rate.Subtract your new, refinanced monthly mortgage payment from your current monthly payment to determine your monthly savings.To calculate your mortgage’s break-even point, follow these calculations: This break-even point is the date on which you can actually benefit from your new lower payment, rather than covering refinancing fees. Once you calculate the cost of refinancing, determine how many years it will take to break even with the new monthly payment-or recover the costs of refinancing your mortgage. Understanding Your Mortgage’s Break-Even Point Either way, mortgage refinancing is never truly free. Under this option, the borrower generally absorbs the fees through a higher interest rate or pays them over time as part of the loan principal. Some lenders offer “no-cost” refinancing that helps borrowers reduce up-front refinancing fees. Borrowers should also prepare to cover any necessary appraisal and inspection costs as required by the lending institution. This includes lender and attorney fees, title search and insurance costs and closing costs, like document preparation. In general, refinancing fees total between 3% and 6% of the outstanding principal on the original mortgage loan. How Much Does It Cost to Refinance a Mortgage?īefore you decide to refinance your mortgage, evaluate the cost of refinancing and whether it’s worth the long-term savings. However, the costs of refinancing can add up quickly, so a cash-out refi may not be the best bet. A homeowner can do this by borrowing more than they owe on their current mortgage. Equity or debt consolidation. Mortgage refinancing also can be used to consolidate debt or otherwise cash in on home equity.Although your monthly payment will increase, shorter mortgage terms typically come with lower interest rates-plus you’ll pay less in interest over the life of the loan. Shorten the term of your mortgage. In contrast to lengthening a mortgage term, some homeowners refinance in order to shorten it.Just remember that a longer mortgage means you’ll pay more interest in the long run. Lengthen mortgage term to reduce payments. If you need to reduce your monthly mortgage payment, consider refinancing to lengthen your loan term.Capitalize on your improved credit score. Mortgage refinancing may also be a good option if your credit score has improved since you took out your original home loan.Refinancing into a fixed-rate mortgage can help you lock in a low rate before the interest rate on your ARM changes. Convert from an adjustable-rate to a fixed-rate mortgage. For borrowers with an adjustable-rate mortgage, the threat of a higher interest rate can loom large.Take advantage of lower interest rates. If interest rates are on the decline, it may be a good time to refinance your home mortgage.VA loans offer low- and no-down-payment options for eligible veterans and other eligible borrowers.Consider refinancing your mortgage if you want to:.Be certain to ask your home mortgage consultant to help you compare the overall costs of all your home financing options. FHA loans have the benefit of a low down payment, but you'll want to consider all costs involved, including up-front and long-term mortgage insurance and all fees.FHA loans are available with as little as 3.5% down.Talk with a home mortgage consultant about loan amount, loan type, property type, income, first-time homebuyer, and homebuyer education requirements to ensure eligibility.We'll explain the options available, so you can choose what works for you. Keep in mind that with a low down payment mortgage insurance will be required, which increases the cost of the loan and will increase your monthly payment.Conventional fixed-rate loans are available with a down payment as low as 3%.Wells Fargo offers several low down payment options, including conventional loans (those not backed by a government agency).
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