Calculating mortgage refinance savings can be a complex process, but understanding how to do it based on your specific situation can lead to significant financial benefits. In this article, we will break down the steps to accurately assess your potential savings, whether you are refinancing to lower your monthly payment, switch from an adjustable-rate mortgage to a fixed-rate mortgage, or tap into your home equity.
Mortgage refinancing involves replacing your current mortgage with a new one, often with more favorable terms. The idea is to reduce your monthly payment, shorten your loan term, or take advantage of lower interest rates. To calculate your savings, you need to consider the following factors:
Follow these steps to calculate your potential savings from refinancing your mortgage:
Start by reviewing your existing mortgage. Take note of your current interest rate, monthly payment, and the remaining balance. You'll need this information to compare with new mortgage options.
Next, get quotes for new mortgage terms from lenders. This includes finding out the new interest rate, the length of the loan term, and the estimated closing costs. Use these figures for your calculations.
Use a mortgage calculator to input your current mortgage information and new mortgage details. Calculate your monthly payments for both scenarios (current and new). Here’s a simple formula to determine monthly payment:
M = P[r(1 + r)^n] / [(1 + r)^n – 1]
Where:
M = Total monthly mortgage payment
P = The loan principal (amount borrowed)
r = Monthly interest rate (annual rate divided by 12)
n = Number of payments (loan term in months)
Subtract the new monthly payment from your current monthly payment. This difference is your monthly savings:
Monthly Savings = Current Payment – New Payment
Multiply your monthly savings by the number of months you intend to stay in your home. For example, if your savings is $200 per month and you plan to stay for 5 years (60 months):
Total Savings = Monthly Savings x Number of Months
Total Savings = $200 x 60 = $12,000
Don’t forget to include the closing costs of refinancing in your calculations. Closing costs commonly range from 2% to 5% of the loan amount. To find out how many months it’ll take for your savings to cover these costs, use the following:
Breakeven Point = Closing Costs / Monthly Savings
Example: If your closing costs are $4,000 and your monthly savings is $200:
Breakeven Point = $4,000 / $200 = 20 months
Refinancing is typically beneficial if you can achieve a lower interest rate (generally at least 0.75% - 1% lower than your current rate), decrease your loan term, or access home equity without exceeding beneficial closing costs. If your breakeven point is far less than the duration you plan to stay in your home, refinancing might be a wise financial decision.
Calculating mortgage refinance savings involves detailed analysis, but when approached step-by-step, it can lead to substantial financial advantages. Always consider your personal financial situation, market conditions, and consult with mortgage specialists to ensure you are making the best decision for your circumstances.
