The term refinancing has been circulating through the real estate world with a heavy force over the past few months. Interest rates are at an all-time low which has sparked a sense of panic among many homeowners trying to ensure they can lock in the low rates on their homes. While in many scenarios re-financing is a great option both financially and from an investment standpoint, there are some instances where it may not be as beneficial.
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Let’s say you finance your home and end up saving a full 2% on interest, that is a BIG deal for most people, and while this does in fact save you on your monthly bill and generate more cash flow, you have to also be sure to look at how long it will take to break even. To find your break-even point, you will take the new loan’s closing costs, divide it by the amount you are saving monthly, and that will tell you how many months it will take for you to break even and actually start saving. For example:
- Closing Costs: $5,000
- Monthly Savings: $80
- 5,000 / 80 = 62.5 Months to break even
Refinancing doesn’t always save you money. For example, if you are well into a 30-year loan, and choose to refinance, you may be extending into a new 30-year loan, thus resetting the clock. In this situation, you will end up spending more. Instead of paying off your loan in the few years, you had left initially, you are now paying interest and fees for a new 30-year period. Loans are available for shorter periods of time, so should you decide to re-finance well into your initial loan, make sure to explore all the options available to you.
Lastly, it is important to remember that refinancing is never free. Even if you don’t have any initial out of pocket fees, closing costs will be factored into your new loan, which will widely contribute to your break-even point and general cost associated with your refinance. Each home loan is different, so ultimately it is up to you when it comes to refinancing. There is no right or wrong answer and no specific break-even number that “makes sense.” If you simply need to help your current cash flow situation, want to lower your interest rate, have low closing costs, etc. then refinancing may be a good option for you.
If you’re currently searching for a new home, have questions regarding the real estate in Camano Island, Stanwood, and the surrounding areas, or would like to speak to a qualified and knowledgeable agent, please feel free to contact our office at any time.