First Tip: Make sure you have an idea of how long you’ll be paying on your new mortgage before selling the home or refinancing. This information will help you decide which of the three basic mortgage types will be best for you. The three basic mortgage types are no closing cost mortgages where the lender pays the closing costs, no closing cost mortgages where the closing costs are rolled into the loan and amortized and mortgages where you simply pay the closing costs at closing.
Keep in mind that in option 1 your interest rate will be higher than normal and in option 2 you’ll actually be paying interest on the closing costs over the course of the loan. No matter which option you choose you will still have some costs to be paid at closing such as your home owners insurance and escrow for taxes.
Second Tip: Know how much money you’ll be saving each month on your mortgage payment when you refinance. This will let you know how much you’ll be saving in pre tax dollars and will help us figure out where we stand in the next tip.
Third Tip: Know how much you’ll be saving on an after tax basis when you refinance your mortgage. You can easily figure this out by getting last years tax returns and seeing how much of your gross income was paid in taxes. You then want to multiply this tax rate by your monthly pretax savings to find out how much you’ll be saving per month after taxes.
Fourth Tip: This is the best tip. Determine how much your out of pocket costs are at closing. Typical estimates of out of pocket closing costs are 3-6%, but this can vary widely from lender to lender. The best way to determine this is to compare each lenders costs.
For example, with closing costs of $2500 you will want to divide that by your monthly after tax savings and that will tell you how many months it will take you to break even on refinancing your new mortgage. If you expect to still be paying on that mortgage after that time than it’s in your best interests to refinance.
It’s always best to compare quotes from several lenders when looking for a refinancing home mortgage loan. This will allow you to find the best possible loan for your situation and with the above tips you’ll know just how long it will take you to recoup your costs when refinancing.