To analyze your potential savings from refinancing your mortgage, you must take several factors into consideration:
Your old payment amount vs. Your new payment amount.
If you are cashing equity out, what are you using the money for? If you are using it to pay off bills, this needs to be factored in. If you are getting an additional $15,000 to pay off other debt, how much have you been paying this other debt? If you are paying $600 per month for this $15,000 in debt and your loan increases your mortgage payment by $150, then your monthly savings is $450 ($600 – $150=$450).
Consider if $6000 of that $15,000 is paying off your car loan that you only have 24 months left to pay on? you would have to ask yourself “Is this mortgage refinance a good idea?” This is because you are taking a 24 month loan and stretching it out over 30 years! For some people it will make sense, for others it won’t. But you need to make these considerations up front in order to make an smart choice.
Now to analyze your savings from refinancing a mortgage, the typical way is to take the total cost of the mortgage and divide it by your monthly savings. So if you are doing a straight mortgage refinancing, without taking cash out, and your closing costs are $2000, and your monthly savings is $125, simply take the $2000 and divide it by $125. The result in this case is 16, that is how many months you need to keep your mortgage to cover your refinancing costs.
During the first two years of savings from refinance your mortgage will go to covering the closing costs. After that the remaining 28 years is pure savings. The rule of thumb is that you want to recoup your costs in less than 36 months. So if your closing costs are $2,600 and your savings is $100 per month after refinancing your mortgage, you will recoup your closing costs in 26 months.
The hard part of evaluating your savings from refinancing a mortgage comes when you are taking cash out. In this case you need to evaluate your desire for a lower monthly payment to see how you feel about stretching your debts out over 30 years. If you are getting cash from the refinancing of your mort age to cover the cost of education or a home remodeling, or for any other reason, you can’t factor in savings into your decision to refinance a mortgage.
You should weigh what you want with the cost of the mortgage and whether or not you’re getting a decent interest rate.
The bottom line is to give your needs and desires some thought and then find a mortgage broker you feel comfortable working with and express those thoughts and desires to that person. He or she should then do whatever’s possible to meet those desires.
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