Should You Refinance Your Mortgage

I Hear That Rates Are Coming Down. How Do I Know If I Should Refinance?

Homeowners often hear that mortgage rates may be coming down and start wondering if refinancing might make sense for them.

But refinancing isn’t always the right decision for every homeowner. The key question is whether the monthly savings outweigh the cost of the refinance.

In this guest article, LeaderOne Branch Sales Manager, Steve Bowmer, explains how homeowners can evaluate refinancing using a simple break even calculation and a few practical considerations.

How much do I need to save for a refinance to make sense?

The answer is a math problem. There are costs associated with doing a loan, such as an appraisal, title insurance, lender fees, escrow fees, etc.

If you take the total of these costs and divide this number by the amount that you are saving per month, that will give you how many month sit takes to recoup the costs of the refinance.

For example, if a refinance costs you $6,000 and the new payment will save you $150 per month, it will take you 40 months to recoup the costs of the refinance.

Simple Refinance Break-Even Formula

Total Refinance Costs ÷ Monthly Payment Savings = Months to Recoup Costs

Aren’t you going to have to collect money to set up a new taxes and insurance (escrow)account?

Yes. We will collect money at closing to set up a new escrow account for this loan if this is what you would like to happen.

Will this make my balance on the new loan be even higher?

Yes, if you don’t want to bring any money in.

If your current loan has taxes and insurance collected in the monthly payment, when you complete the refinance, approximately 2–3 weeks after closing, you will receive a refund of the money in your old loan's escrow account.

If you look at your current mortgage statement, you should be able to see where it shows your escrow balance. That balance will be in the vicinity of the amount we will collect to set up the new escrow account.

You will also skip a monthly payment.

What some clients are doing is taking the escrow balance refund, the one-month payment that you skip, and adding it to your first payment. This can help bring your balance back down.

For example, let’s say we are collecting $4,000 to set up your new escrow account. The refund of your escrow balance is $3,200, and the one monthly payment you skipped is $2,800.

You could take the $6,000 and add it to your first monthly payment to bring the principal balance of the loan down.

How do I know how many months is the right amount of time to recoup refinance costs?

One of the answers to this question is how long you think you will be in the home.

If you won’t be living in this home in five years because the kids will be off to college and you don’t need a home this big, then 60months to recoup is too long.

Years ago, I read that the average mortgage in the U.S. is open for 39 months. Since then, I have used 36–48 months as a coin flip.

If the recoup time is:

• Less than 36 months – there should be strong consideration for moving forward with the refinance

• 36–48 months – it can make sense, but it doesn’t blow my hair back

• Longer than 48 months – it may take too long to recoup your money

A lot of things can change in four or more years.

How low are mortgage rates going to go?

No one really knows.

Plenty of people have an opinion. Freddie Mac recently projected that the 30-year fixed interest rate will be around 6.1% at the end of 2026, and we are practically there already.

There is nothing on the horizon that clearly signals that rates will drop significantly further or rise dramatically.

We have been bouncing around in the current range since the beginning of September, and every time we get close to breaking out of this range, we bounce back the other direction.

Does it make sense to pay 7% for another year, when you can get roughly the same rate today as you might see later in the year?

Again, no one really knows what is going to happen with rates. No one knew about COVID-19, and it had a major impact on the mortgage market.

About the Author

Steve Bowmer is a Branch Sales Manager with LeaderOne Financial who helps homeowners evaluate refinancing opportunities and make informed decisions about their mortgage strategy. Steve focuses on helping borrowers understand the numbers behind refinancing so they can decide whether it truly makes financial sense for their situation.

Apply online or contact Steve today:

https://www.leaderonefinancial.com/mlo/steve-bowmer

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