Monthly payment savings breakdown
Through year 10
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How we calculate your refinance savings
Your total savings during the time you plan to stay in your home is made up of two parts: cash savings and the difference in the amount you’ll still owe on your new mortgage.
What are cash savings? That’s the difference between your current monthly mortgage payments and your new monthly mortgage payment (minus the amount you’ll need to pay for closing costs — about 3% of the loan). In other words, it’s cash in your pocket.
What’s the difference in the amount you’ll still owe? That’s the difference between the amount of principal on your current mortgage and the amount of principal you’ll owe on your new loan when you refinance.
Understanding the breakeven period
The breakeven period represents the number of years you’ll have to make the new monthly payment before you recoup the costs of refinancing.
Nerd Tip: It typically makes sense to refinance your mortgage if you’re planning to stay in your home for longer than the breakeven period.
How long do you plan to stay in your home, and why does it matter?
The first step in deciding whether or not to refinance is to estimate how long you plan to stay in your home. If you think you could be moving soon, it may not make sense to pay thousands of dollars in closing costs just to lock in a lower rate. Conversely, if you plan to stay in your home for the life of your loan, by refinancing and extending the loan term, you may save in cash payments for the first few years but end up paying more in total interest payments over the life of your new loan.
Why should you consider a mortgage refinance?
In many instances, you should refinance to save money on your home mortgage. You’re a good candidate to refinance if you’re planning to stay in your home for a while and are refinancing at a lower interest rate, switching off an adjustable-rate mortgage, or looking to eliminate private mortgage insurance.
The top reasons to refinance are:
- Get a lower interest rate: Lowering your mortgage rate can reduce your monthly payment if the repayment term (duration) remains the same. However, keep in mind that a refinance can carry fees ranging from 2% to 5% of the loan balance due.
Mortgage refinancing for a lower rate can make a lot of sense, especially if your credit score has improved. In that instance, you might qualify for a significantly lower mortgage rate today. Check your credit score and history before you go any further.
Nerd Tip: Rather than simply focusing on reducing your monthly payment, it’s wiser to refinance when you can save money with a lower interest rate, without extending the loan term.
- Switch from an adjustable-rate mortgage to a fixed rate: An adjustable-rate mortgage typically comes with an initial period of a steady interest rate then resets to a floating rate for the rest of the loan. It makes sense to use an ARM if you know you’ll live in a home for only a few years; you could save a lot of money with a lower interest rate in the interim.
Converting to a fixed mortgage from an ARM is especially useful if you plan to stay in your home long-term. For example, if you have a 5/1 ARM, you could complete a refinance by the end of the fifth year and lock in a steady rate with a 30-year fixed-rate mortgage.
- Eliminate private mortgage insurance: If you buy a home with less than 20% down, you typically are required to pay private mortgage insurance, or PMI, which protects the lender in case you default on the loan.
Annual PMI premiums can cost between 0.5% and 1.5% of the mortgage. Sometimes, homeowners are able to cancel mortgage insurance once the balance on the mortgage falls below 80% of the value of the home. However, loans insured by the Federal Housing Administration require mortgage insurance for the entire life of the loan. Read more about FHA loans.