If you are thinking about refinancing your home in Virginia, now is a pretty good time to do it. Mortgage rates have climbed a little bit since the linked post but remain low compared to last year.
You probably know, however, that refinancing carries a cost. You may wonder whether it is worth it to refinance, especially for a small percentage change in your interest rate. How do you know if refinancing financially adds up?
There are several factors to consider:
- Cost to refinance
- Potential savings over the lifetime of your mortgage
- Factors specific to your financial needs
The cost of a refinance can vary quite a bit based on a number of factors, but on average, you can expect around $4,000 worth of closing costs.
So, the question you need to ask is whether the amount of money you will save over the long term (or the other potential benefits you are aiming for) sufficient to offset this cost.
Even a change as low as one percentage point in your favor may be sufficient to justify the cost of a refinance.
You will need to do the math, considering how much time is left on your mortgage (and whether you will be adjusting the term of the loan or not through the refinance).
You should be able to calculate how much you could potentially save per month. Extending that across the years of your mortgage, you should also be able to estimate approximately how much you could save over the lifetime of the loan.
The savings can add up fast. Imagine, for example, that your calculations tell you that you could save around $100 per month by refinancing to a lower interest rate.
Over the course of the year, that would be approximately $1,200 back in your pocket.
Now, let’s say that you still have 15 years left to pay on your mortgage. You would save on the order of $18,000.
That obviously more than offsets the $4,000 you would spend on the refinance. So, financially, such a refinance would make sense.
If the difference in your favor is smaller, you will need to decide whether the process of getting the refinance is worth it to you in terms of time and energy.
Another consideration is that if you are changing the term of your loan to a shorter one, doing so can save you money over the lifetime of your mortgage in terms of total interest.
Adding up this interest that you avoid, you could find that it also offsets the cost of a refinance sufficiently to justify it.
Finally, it is worth considering the third factor in calculating the worth of a refinance: financial considerations which are specific to you.
Saving money over the lifetime of a mortgage is not the only reason to refinance. You could also be refinancing to:
- Reduce monthly mortgage premiums. If money is tight, just giving yourself more financial flexibility each month could justify a long-term cost. If you roll the refinance cost into your mortgage and extend your loan term, you could find it easier to survive each month.
- Change your interest rate format. If you want to change the format of your interest rate from adjustable to fixed or vice versa, the cost of a refinance may be worthwhile to you in ways that go beyond the money. For example, you might switch to a fixed rate as much to avoid stress and uncertainty as to try and keep your payments low.
- Stop paying for private mortgage insurance (PMI). Some of the ongoing costs of homeownership may not be incorporated directly into your mortgage but might be tied to the type of mortgage you have. For example, you may pay for PMI separately, but be required to do so because you have an FHA mortgage. Refinancing to get rid of the PMI may quickly compensate for the cost of the refinance even if the interest rate on your loan is unaffected and you are paying the same monthly amount on your premium.
Those are just a few examples of some of the possible benefits that can make a refinance worthwhile.
First Residential Mortgage Can Advise You on Whether a Refinance Will Pay Off
When you meet with our loan experts during your refinance consultation, we can review your financial details and help you evaluate the specific pros and cons of a refinance given your situation.
Our goal is to save you money and help you make an informed decision with which you are confident.
To get started now, please call us today at (540) 838-5868 to schedule your refinance consultation. We serve customers in and around the Blacksburg area and throughout Virginia.