Personal finance

Is it the right time to refinance your mortgage? | Personal finance

If you have a balance of $300,000 on your mortgage and are refinancing a new 30-year loan, reducing your interest rate from 3.75% to 3.25% will save you about $84 per month or $1,008 per year. If you can reduce the rate by 1%, from 3.75% to 2.75%, your monthly savings would be $165 per month or $1,980 per year.

Of course, you don’t have to refinance into another 30 year loan. If your finances have improved and you can afford higher monthly payments, you can refinance your 30-year mortgage into a 15-year fixed rate mortgage, which will allow you to pay off the loan faster and pay less. of interests.

However, taking a look at your monthly savings is only part of the refi equation. You also need to consider the cost of terminating your loan and how long it will take you to recoup those costs, or “break even.”

Just like with a purchase loan, you will have to pay closing costs for a refinance. These costs may include origination and application fees, appraisal and inspection fees, and title search fees. In total, closing costs can represent between 3% and 6% of the total amount of the refinanced loan.

You can determine your break-even point by dividing your total closing costs by the amount you will save each month. The result is the number of months it will take you to recover the cost of refinancing and start saving money. The less time it takes to break even, the more sense it makes to refinance your home loan.