Should I Refinance for $100 or Less Savings?
Small Savings from Refi can Mean Big Impact
Record low interest rates are making it extremely enticing for homeowners to refinance their current mortgage, but how do you know if it’s worth it? Maybe it would be a nominal reduction from your current rate, resulting in a small monthly savings of $50 to $100. Depending on your situation and your objectives, it could still turn out to be a very savvy move in spite of the moderate numbers at first glance.
When is it worth it to refinance?
Everyone’s circumstances differ, from how long they’ve been in the home and how much equity has built up, to current financial situation and future plans. So, before answering, you’ll want to ask yourself a few questions. What is your situation and what are your goals? Reasons to refinance your existing mortgage are typically one of the following:
Reduce your interest rate
Reduce your monthly payment
Reduce your term
Eliminate the private mortgage insurance (PMI)
Tap the equity for cash
Depending on your objectives, even a small interest rate decrease or additional monthly savings could pack a punch in the long term. The rule of thumb has often been to refinance with at least a two percent interest rate reduction, but with the Fed’s strong stance on keeping rates low during the economic crisis, even .5 to 1% can make a difference.
For example, if your loan balance is $400,000 at a 3.75%, and you can qualify to refinance at 3.25% for a new 30-year fixed, that would drop your mortgage payment to show a savings of $100 per month. It may not seem like a big difference – and remember, you’re replacing and extending the length of your loan – however, being proactive with that savings can be worth it in the long run.
When refinancing small can save big
If you want to take advantage of the equity your home has gained, but aren’t sure it’s significant enough to make a difference, consider these additional saving strategies:
Debt Consolidation | The average credit card rate is 17% APR, but it can rise significantly higher with the big banks by missing only one payment. If you’re able to take cash out of your equity with a refinance program, and apply it directly to your unsecured debt with double digit interest rates, you could save thousands over time and potentially improving your credit score.
Ditch the PMI | Private mortgage insurance is often required when purchasing your home with less than 20% down payment or less-than-solid credit standing. When your equity grows and/or your income and credit improve, it may be the right time to refinance in order to qualify for the elimination of the PMI. Even if your monthly mortgage savings isn’t huge, it can be handily offset by losing the extra mortgage insurance which runs between .5 and 1% of the total loan.
Roll the Savings Back In | When we look at the earlier example that offers about $100 savings each month, it doesn’t seem like much, right? Good! That perspective will make it easier to automatically apply the difference to your new payment. By doing so, you will reduce the term by five years and saving thousands of dollars in interest over time.
Whether consolidating high-interest debt, eliminating the PMI, or rolling your refi savings back into the loan, it’s important to make the arrangement then forget about it – like an automatic deposit from your paycheck that you don’t even notice.
Is it worth it to refinance today?
Two of the biggest factors to consider when approaching a refinance offering moderate savings potential are how long you plan to stay in the home, and when is the break-even point for closings costs and fees. If you don’t think you’ll be moving in the near future, then the lower rate and payments will make a noticeable impact while your home continues to build equity.
The break-even refers to the point when the costs involved with refinancing equal the amount you’ll save.
A lender like EnTrust Funding (ETF) can help you calculate this and all of the potential saving scenarios we’ve covered. Can we turn your seemingly small savings into a considerable financial benefit? Contact us today to discuss the possibilities.