September 2nd, 2020 9:37 AM by Jackie A. Graves
Mortgage rates are at record lows, so it's not surprising that refinancing applications have been submitted in large volumes in 2020. On August 6, Freddie Mac data showed 30-year mortgage rates had reached an all-time low of 2.88%. And according to the Mortgage Bankers Association, refinancing applications are 84% higher than they were at this time last year.
With that in mind, if you haven't pulled the trigger on refinancing yet, here's an overview of how to determine how much you could save by refinancing.
How much could you save?
This is a more complicated question than it may seem. Many people want to know how much lower their monthly payment will be if they refinance, but there's also the matter of the long-term savings as well. So let's take a look at these one at a time.
How much could you save per month?
Here's the easy part. Determine how much of your current mortgage payment is principal and interest (P+I). You should be able to find this amount on your latest mortgage statement, and if you can't, simply subtract your monthly escrow payment from your total mortgage payment.
Then, figure out how much your new mortgage payment would be if you were to refinance. If you obtain a refinancing quote or get pre-approved by a lender, they'll probably do this part for you. Or you can see what your new payment might be by using a mortgage calculator. Subtracting your potential new payment from your current P+I mortgage payment will tell you your monthly savings.
How much would you save over the long run?
Here's why the question of how much you can save by refinancing is more complicated than it might seem. When you refinance your mortgage, you generally do so with a new 30-year mortgage. Meanwhile, the mortgage you're replacing will have some other repayment horizon.
As an example, let's say that you're five years into a $300,000 mortgage that has a 4% interest rate. Your monthly P+I payments are $1,433 and you still owe about $271,000 of your original balance.
We'll say that you decide to obtain a new 30-year mortgage with an interest rate of 3.25% and $3,000 in closing costs to refinance the remaining balance. You'll have a new P+I payment of $1,180 per month, so you'll lower your monthly mortgage payments by $253.
However, here's the long-term comparison of the two:
So, by refinancing, you'll save $2,100 over the long run. It's still the cheaper option, and it could help you to reduce your monthly costs. But it isn't the dramatic amount of savings that the difference in monthly payments might suggest.
Some situations are more complex
Of course, not every mortgage refinancing situation is easy to evaluate when it comes to long-term savings. This is especially true if you're doing a cash-out refinance, meaning that the new mortgage will have a higher principal balance than the one it replaces.
As an example, let's say that you refinance your $300,000 mortgage balance that has a 5% interest rate with a new $400,000 loan with a rate of 3.25%, and your monthly payment increases by $200 per month. Now, you seemingly aren't saving money since more will be flowing out of your bank account each month to make your payments. But this is a far cheaper way to borrow $100,000 for a home improvement project or other major expense as compared to taking out a personal loan or borrowing in another way.
The key takeaway is that mortgages are cheaper now than they've ever been before. If your refinance mortgage lender offers you a rate that's significantly lower than what you're paying now and you're planning to stay in your home for several years, it could be a great time to think about refinancing.
Today's Best Mortgage Rates
Chances are, mortgage rates won't stay put at multi-decade lows for much longer. In fact, the Fed has already signaled that it expects rates to continue increasing. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase. Click here to get started by scanning the market for your best rate.
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