January 2020 I investigated the refinance options on my mortgage to take advantage of lower interest rates as I wanted to save money and also pay the townhome off earlier than my original plans. I started shopping lenders to find out what they were offering. Luckily I contacted my previous mortgage broker as he had become a independent and offered the best deal. Reducing my interest 2 1/8% afforded me a lower monthly payment even though I was rolling my closing cost into the financing. When the appraisal came in we discovered I could drop PMI on the loan. As an added benefit since there wasn’t PMI I could choose if I wanted to escrow my insurance or not. Reality check here…you MUST be disciplined in your savings to not escrow. If you don’t feel comfortable handling it yourself, don’t! If you do, what I did was open a separate savings account and add a line item to my monthly budget for the homeowners insurance premium due next year. Rather I earn a little bit of interest instead of others.
So what is your monthly mortgage payment? Think of the exact amount.
Now that you have the number in your head, ask yourself: what else could I be doing with those hundred of dollars each month? Invest them, save for the kid’s college or dream vacation time.
So how do you determine if refinancing is a good choice for you? Do a break even analysis. A break even analysis means running the numbers on whether you’ll be in your home long enough to benefit from the savings that a lower interest rate and payment could bring. Ideally you want to lower your interest rate 1% – 2% or more as it will decrease your break even timeline.
Here’s an example. If your closing costs are coming in at $3,000 and you’ve estimated that you’ll save $100 a month by refinancing, it will take you 30 months, or 2 1/2 years, to recover your costs. If you plan to be in your home at least that long, it’s probably worth it. But if you plan to move before then, it’s not a good idea.
This is the basic information for refinancing your mortgage so if you have specific questions let me know. It’s a great time to look at this as rates are down. Stay safe everyone and remember, you’re not alone in this financial journey!