• Danny Lee, CFP®, CRPC®

4 Things to Consider When Refinancing Your Home Loan

Are you looking to refinance your loan to lock in a lower rate? Or maybe the home has appreciated, and you're looking at potentially taking some cash out, aka "cash-out refinance"?



All viable reasons to look into refinancing your current mortgage loan but before reaching out to the company sending you mailers about being pre-approved for a new loan at a "record low rate." Make sure you speak with a trusted lender or financial professional and consider these four things before refinancing.


1. New rate/term

One key reason for refinancing may be to lower your monthly payment or pay off the loan faster (30 years vs. 15 years). When you originally purchased the home, you may have locked in a higher interest rate, and since then, rates have dropped. If your goal is paying a lower monthly payment and the lower rate help achieve your saving goal, refinancing may be a good option. But...


2. Cost to refinance

Refinancing has a cost, which typically is 2%-6% of the total loan. So if you're refinancing a $300,000 loan, the cost to refinance may range from $6k-$18k. Understanding the cost is essential to figure out if refinancing makes sense financially and determine if the benefits outweigh the cost. How do I do that? Calculate the "breakeven."


3. Breakeven

Breakeven calculates the number of months or years (length of time) it would take to recoup the cost from refinancing based on your monthly savings on the lower interest rate term. From our previous example, if the refinance cost $6000 and the monthly savings was $100, it would take 60 months or five years to see the breakeven $6000/$100 = 60 months/12 = 5 years). So selling the home before the five-year breakeven, refinancing cost > monthly savings. Question to ask? How much will I stay in this house?


4. Refinancing points

Points are an upfront fee buyers pay to the lender to lower their interest rate for the life of the loan. One point typically represents a rate reduction of 0.25% - simply put, the buyer is buying down the rate. (i.e., 4% rate with 1 point purchased, rate drops to 3.75%.) One point typically costs 1% of the loan amount.


Hypothetical example below of refinancing a 30 year loan with points ⬇️


There are other various factors to consider when refinancing your current loan, and the reason it's important to consult with a financial professional to help run the calculation and to work together with a trusted lender.


Disclaimer: The blog content of Modern Millennial Wealth LLC (“MMW”) is provided for informational purposes only and is not intended to constitute financial or investment advice. At times, MMW blogs will share personal experiences and that information shared is intended to be general in nature and should not be relied upon as personal financial advice. You should not rely upon any information contained on this blog for financial or investment advice. Reading MMW blog(s) is not intended to and shall not create an advisory relationship between you and Modern Millennial Wealth LLC. Neither Danny Lee, nor Modern Millennial Wealth LLC makes any representation or guarantee about the accuracy of the information contained in this blog or links to other websites. Neither Danny Lee, Modern Millennial Wealth LLC., nor anyone acting on their behalf, will be liable under any circumstances for damages of any kind.


Sources:

https://www.lendingtree.com/home/refinance/how-much-does-it-cost-to-refinance/


https://www.nerdwallet.com/article/mortgages/if-you-refinance-a-mortgage-when-will-you-break-even


https://www.bankrate.com/mortgages/mortgage-points/


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