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Oftentimes, it is challenging to determine if a refinance is beneficial; there is a lot of conflicting information that makes people wonder. Is refinancing your home worth it? Simply put the answer is — it depends; if done correctly, refinancing can save you thousands of dollars.
Homeowners are often tempted to refinance their home when interest rates decline and this can be a very smart move. In fact, let’s look at how refinancing from a 3o-year fixed rate mortgage of $200,000 at a rate of 5.25 percent to the same mortgage at 4.75 percent makes a difference:
* 30-year/200k/5.25 — Monthly Payment: $1,104 — Monthly Interest — $875
After one year, you would have paid a total of $13,248 and $7,838 in interest payments
* 30-year/200k/4.75 — Monthly Payment $1,044 — Monthly Interest — $792
After one year, you would have paid a total of $12,528 and $9,504 in interest payments
This alone shows a savings of $1,666 for the first year of payments. Now let’s look at a totally different scenario. Let’s assume for a moment you originally took out a $200k mortgage five years ago at 5.25 percent and now you are going to refinance your home. The new mortgage will be a 20-year mortgage with an interest rate of 4.75 percent. Now you have this scenario:
1. Balance on current mortgage — $184,299 (after 60 months’ payments on a 30-year mortgage)
2. Estimated Closing Costs — $3,000 (estimated and rolled into new loan) new loan: $187,299
Now keep in mind, your monthly payments will increase ($1,210) but your total payments will now be $348,480 versus $397,440 had you continued paying your 30-year mortgage.
Why Should I Refinance?
If a homeowner can save money over time, there are clear benefits to refinancing their home. This is true when interest rates drop significantly, when a borrower can get a no-cost refinance or when a borrower can carve years off their current mortgage term. This does not mean refinancing is right for everyone; there are times when refinancing is not a good idea. One example of this is if you are planning to move within five years; in most cases, you will not recapture the expense of refinancing before five years and therefore it may not be worthwhile to refinance.
If you currently have an adjustable rate mortgage, you are paying higher than current interest rates or you think it may be beneficial to lower the term of your current mortgage, contact Federated Lending in Buck County, PA for help. We have years of experience helping homeowners make a decision about refinancing their home; if it is a beneficial move for you, we can help you determine how to refinance your current mortgage.