Mortgage refinance makes good sense when it reduces your overall debt - plain and simple.
Instead of targeting a specific interest rate you wish to refinance into, it is better to know the break-even point when deciding to choose to refinance or not.
The break-even point in a mortgage refinance is the length of time it will take your overall savings to compensate for the cost of doing the refinance. The cost here would be the "closing costs" the broker charges you to refinance the loan.
Here's an example.
Your current loan amount you want to finance is 250,000 at 8% - monthly payment of $1834.
You are considering a 6% loan, which would bring your monthly payment down to $1580.
This will save you $254 per month.
Keep in mind the closing costs to refinance this loan were $2000.
So, break-even calculated as such...
Cost of Refi divided by savings per month= months until breakeven...
Or
2000/254=7.8 months, which we round up to 8 months.
So it takes 8 months of paying at the new 6% interest rate to cover the cost of the refinance. After 8 months you are truly getting the full $254 savings for the life of the loan. A very smart choice if you like the house and plan on living there.
This is assuming you paid up front for the refi - that is - paid the $2000 out of pocket with cash at the time of closing. But what if you don't have the cash?
If you roll the $2000 into the cost of the loan you would be financing $252,000 at 6.5% and paying a little more per month - $1592. Still a nice savings of $242 per month from the $1834.
Plus there's no breakeven to worry about! You realize a savings as soon as you refinance because you paid no upfront closing fee - you added it to the loan.
What's the catch?
You will pay more in overall interest on the entire loan ($4320 more), by rolling the closing costs into the refinance.
Is this a big deal? Probably not...you've still reduced your monthly payment by $242, right off the bat. Improving your short term cash flow is usually the most important consideration in a refinance situation.
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