How Long Should I Wait to Refinance My Mortgage?

Let’s do some refinance math!

When the cost of refinancing is recovered in less time than you plan to retain the home, it makes financial sense to refinance.

How do you know when your property value has increased enough to avoid mortgage insurance?

That is where your realtor comes in! They are your best resource to assess the value of your home. A realtor is a valuable resource to you on many fronts, and that relationship should not end at the closing table. There is a science and an art to home appraisal, so there are no guarantees of value until the report comes back, but an experienced realtor should be able to tell you when you’re in the ballpark. Historically, we’ve seen a 3.5 to 5% appreciation per year, but this varies by market. Most refinance loan amounts cap out at 80% of appraised value, and if there’s enough left over after you pay off your existing mortgage, you can opt to roll your closing costs into your new loan, bringing no additional funds to closing! Conversely, if your home has not yet appreciated enough, you can still refinance if you have available funds to make up the difference. In the long-term, it may save you tens of thousands of dollars depending on how long you plan to retain the property.

Ok, so you got all that – Now let’s jump into the numbers. Here’s what you’ll need to do the math:

  • Your current mortgage interest percentage
  • Your current monthly mortgage principal and interest payment (remove property taxes and homeowners insurance)
  • Your current monthly mortgage insurance payment (if applicable)
  • Your current mortgage loan balance
  • Your estimated property value today

Now we’re going to compare all of that to:

  • The mortgage interest rate available today for your specific scenario
  • The monthly mortgage principal and interest payment you would have with this new and improved rate
  • The maximum new loan amount – 80% of the new estimated value

With this information we are going to calculate your monthly savings under the new terms, and divide that into the cost of refinancing to see at what point you break even and begin savings!

Let’s look at an example to see how this plays out: (example based on 740 credit score, primary residence)

Original purchase price: $350,000 / 10% down / $315,000 loan amount / 6.5% interest rate

That would result in the following monthly breakdown:
P&I payment $1,990
Mortgage Ins. 70
TOTAL: $2,060 (before escrows)

Making the standard minimum payment on the scenario above, your loan balance would be approximately $307,000 after two years. Assuming 5% appreciation, your home would be worth $385,000. Using the 80% rule discussed prior, your maximum loan amount would be $308,000. Enough to pay off your current loan, drop your mortgage insurance entirely, and take advantage of the lower interest rate, but not enough to roll in your closing costs. In this scenario, you would have to be prepared to bring a little money to closing.

Refinance loan amount: $308,000 / 5.5% interest rate for this example
P&I payment $1,750
Mortgage Ins 0
TOTAL: $1,750 (before escrows)

Comparing the two, we see the refinance scenario saves the homeowner $310 per month. Now let’s move on to the cost of the  refinance transaction…

There can be a large variance between lenders on fees. Below are the fees you would pay today when refinancing with the TLC Group at Canopy Mortgage – Home of the Mortgage Dogs in our current example:

Lender fees:
Processing fee: $995
Underwriting fee: $600

Third Party Fees:
Appraisal: $625
Credit report & monitoring: 95
Lender’s Title Ins: 1,700
Title endorsements: 50
Recording fee: 50

There are additional closing costs which are NOT fees.

  • Prepaid interest – Amount depends on what day of the month you close. To minimize this expense, close at the end of a month. Mortgage interest is always paid in arrears. When you make a payment, you are paying interest for the previous month. So, let’s say your refinance closes on July 15th. Your first payment on the new loan won’t be until September 1st. When you make that September payment, you are paying interest for August. When we close the new loan, in this example, you have to pay interest for July 15-30. So this is interest you would be paying regardless of refinancing – it’s just a more tangible out-of-pocket when you have a refinance.
  • Rebuilding of escrow account – Amount depends on what time of the year (how close to taxes and insurance premium due date) you close, but here’s the thing…. You already have an escrow account with your current lender. So while these are funds you have to come up with to bring to closing in order to build up the escrow account on the new loan, your existing lender will be refunding your current escrow balance back to you within 20-30 days of receiving payoff. So the out of pocket is very temporary, and you can expect a nice, fat check in the mail to offset it.

We save $310 per month by refinancing in this example. The actual refinance costs are $4,115. If you do that math ($4,115 divided by $310), you’ll see that the break-even point is 13.27 months – basically ONE YEAR. If you plan to retain this home for more than one year, this refinance would be a financially advantageous proposition.

Have questions about your specific scenario? I am always available to work numbers for you.

Schedule a time with me whenever you’re curious. We are here to be of service.

Tammy Metzger

Residential Mortgage Loan Originator. Dog Mom. Knowledge Seeker. Voracious Reader. Solo. Outdoors enthusiast. Genre Film Lover.

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