Mortgage rates are coming down and you might think this is a good time to refinance. But is it? Here’s what your mortgage broker never told you.
You should consider refinancing when the savings generated from refinancing your old mortgage is greater than the costs of originating a new mortgage.
First, let’s look at the costs of origination. The typical cost to underwrite a mortgage is typically 1-2% of the loan amount. So if your mortgage is $500,000 the underwriting fee would be at least $5,000. You will also likely incur out of pocket expenses to refinance that include an application fee, attorney fee, title search, appraisal, and a local recording fee. Expect to pay another .5% for these additional fees or an additional $2,500. Add these up and your cost hurdle is $7,500. Will your savings exceed the costs?
Now, let’s look at your savings. For this, you will need a mortgage calculator or go online to www.mortgagecalculator.org. Input your expected new mortgage interest rate, loan amount and new term to maturity. Subtract the total monthly payments on your new loan from the total monthly expenses on your old loan. This is your gross savings.
Does the savings from refinancing exceed your costs? Great, but remember to compare apples to apples. Here’s something most people dont know. You can ask your mortgage broker for a loan that matches the remaining term of your current mortgage so you can compare the two loans side by side. Also, remember that your out of pocket costs are in today’s dollars and your savings are spread out over the term of the new loan so the present value of those future savings have to be discounted back to the present.
In short, you need to compare the costs of refinancing to the present value of the savings generated. Just because you are paying less per month doesn’t mean you are saving money. Calculate how long it takes you to recoup the cost of refinancing. Will you stay in the home at least this long? If not, your savings are not enough to refinance your current mortgage. If you need help with this calculation you can contact Compound Wealth Advisors, a fiduciary wealth management firm.
