Refinancing is when you apply for a secured loan in order to pay off another different loan secured against the same assets, property etc. If this original loan had a fixed interest rate mortgage which has now declined considerably, then you would like to avail of a new loan at a more favorable interest rate.
However, unless you do the math before you trade in one home loan for another you could be wasting both time and money.
What you truly save is based on how much the new loan costs and how long you’ll be in the home:
Costs: Add up ALL the costs, which could include points, and fees for the application, loan origination, appraisal, attorney, credit report, extra insurance, inspections, private mortgage insurance, recording, survey, title insurance, underwriting and others.
Monthly Savings: Figure your monthly savings by subtracting your current monthly payment from your refinanced mortgage’s monthly payment.
Tax Cost: Multiply your monthly savings by your combined state and federal tax rate.
Net Savings: Subtract your tax cost (because the cheaper loan gives you a smaller tax benefit than the previous loan) from your monthly savings.
Break-Even Point: Divide your total costs by your net savings to determine how many months it will take to pay off the cost of refinancing.
