Refinancing a home mortgage can be a smart financial move, offering potential savings through lower interest rates, reduced monthly payments, and shorter loan terms. However, understanding how to calculate your savings is crucial to determine if refinancing is worth it. This blog will guide you through the process of calculating your savings with mortgage refinancing, helping you make an informed decision.
Understanding Refinancing a Home Mortgage
Before diving into the calculations, it’s important to understand what refinancing a home mortgage entails. Refinancing involves taking out a new loan to pay off your existing mortgage. The goal is to secure better loan terms, such as a lower interest rate, reduced monthly payments, or access to home equity.
Step 1: Gather Necessary Information
To calculate your savings, you’ll need to gather the following information about your current mortgage:
- Current Loan Balance: The remaining amount you owe on your mortgage.
- Current Interest Rate: The annual interest rate on your existing mortgage.
- Remaining Loan Term: The number of years left on your current mortgage.
- Monthly Payment: Your current monthly mortgage payment.
You’ll also need the following information about the new loan you’re considering:
- New Interest Rate: The annual interest rate on the new mortgage.
- New Loan Term: The number of years for the new mortgage.
- Closing Costs: The fees associated with refinancing, such as application fees, valuation fees, legal fees, and other costs.
Step 2: Calculate Monthly Savings
1. Determine New Monthly Payment
First, calculate your new monthly payment using the new interest rate and loan term. You can use an online mortgage calculator or the following formula:
M=P×r(1+r)n(1+r)n−1M=P×(1+r)n−1r(1+r)n
Where:
- MM is the monthly payment
- PP is the loan principal (current loan balance)
- rr is the monthly interest rate (annual interest rate divided by 12)
- nn is the number of monthly payments (loan term in years multiplied by 12)
Example: If your current loan balance is $300,000, the new interest rate is 3%, and the new loan term is 20 years, your new monthly payment would be calculated as follows:
M=300,000×0.0025(1+0.0025)240(1+0.0025)240−1M=300,000×(1+0.0025)240−10.0025(1+0.0025)240
2. Calculate Monthly Savings
Subtract the new monthly payment from your current monthly payment to determine your monthly savings.
Example: If your current monthly payment is $1,600 and your new monthly payment is $1,300, your monthly savings would be:
Monthly Savings=1,600−1,300=300Monthly Savings=1,600−1,300=300
Step 3: Calculate Total Savings Over the Life of the Loan
1. Determine Total Payments
Multiply your new monthly payment by the number of months in the new loan term to find the total amount you’ll pay over the life of the new loan.
Example: If your new monthly payment is $1,300 and the new loan term is 20 years (240 months), the total amount paid over the life of the loan would be:
Total Payments=1,300×240=312,000Total Payments=1,300×240=312,000
2. Compare Total Payments
Calculate the total amount you would pay over the remaining term of your current mortgage using the same method.
Example: If your current monthly payment is $1,600 and you have 20 years left on your mortgage, the total amount paid over the remaining term would be:
Total Payments=1,600×240=384,000Total Payments=1,600×240=384,000
3. Calculate Total Savings
Subtract the total amount paid over the life of the new loan from the total amount paid over the remaining term of your current mortgage to determine your total savings.
Example:
Total Savings=384,000−312,000=72,000Total Savings=384,000−312,000=72,000
Step 4: Consider Closing Costs
1. Calculate Break-Even Point
To determine if refinancing is worth it, calculate the break-even point by dividing the closing costs by your monthly savings. This tells you how long it will take to recoup the costs of refinancing.
Example: If the closing costs are $5,000 and your monthly savings are $300, the break-even point would be:
Break-Even Point=5,000300=16.67 months Break-Even Point=3005,000=16.67 months
2. Evaluate Long-Term Savings
If you plan to stay in your home longer than the break-even point, refinancing can be a good financial move. If not, you may want to reconsider.
Example: If you plan to stay in your home for 10 years (120 months) and the break-even point is 16.67 months, you’ll enjoy significant savings over the remaining 83.33 months.
Conclusion
Calculating your savings with mortgage refinancing involves gathering necessary information, determining new monthly payments, calculating monthly and total savings, and considering closing costs. By following these steps, you can determine if refinancing is worth it and how much you can potentially save. If you’re ready to explore refinancing options, contact a trusted mortgage broker to guide you through the process and help you achieve your financial goals.
