If you are thinking about refinancing your house as a way to save money, it might be wise for you to perform two calculations before going through with the deal. Before you can do this, you will need to talk to your lender to find out what the new interest rate would be on your loan, and to find out how much the closing costs will be.
Calculate how much money you would save each month
Your first step in making this decision is to calculate how much money you will save by refinancing. If you are strictly refinancing your house, and not planning on taking out any additional money from the equity in it, this will be an easy calculation.
You will simply need to ask the lender how much your new payments would be on the loan. If your new payments will only drop $25 or $50, it might not be worthwhile to you to refinance. On the other hand, you might find that your new payments would be $200 or $300 less per month. In this case, refinancing could be very useful.
If your purpose of your refinancing is to get extra money to pay off your credit card bills, you should begin by looking at the interest rates on your credit cards. As long as the interest rate on your new loan will be less than the rates on your credit cards, refinancing is probably a great way to reduce your monthly payments.
Find out how long it would take to recoup costs
The second important calculation to make involves finding out how long it would take for you to recoup the costs of the loan. According to Bankrate, the average amount paid for closing costs on a refinance for a $200,000 mortgage was $3,754 in 2012. The amount you pay for closing costs might be more or less, but this is something you need to know before refinancing.
To determine if refinancing would pay off, you should divide the amount of closing costs by the amount of money you would be saving each month if you went through with it. This will tell you exactly how long it will take to pay off the costs of closing on the loan in terms of months. For example, if your closing costs will be $3,000 and you will save $200 a month, it will take you 15 months to make this refinance worthwhile.
If you are planning on selling your house within a year or two, refinancing probably doesn't make a lot of sense. If you plan on living in your house for 10 or 20 more years, refinancing would probably be a great idea.
To learn more about current interest rates and how refinancing works, contact a lender, like Liberty Escrow Inc.