Refinance Or Not? That May Be The Question On Your Mind
It is possible that refinancing may just be the answer to your problems but you are not sure if it is the right thing to do. Many home owners are considering refinancing because interest rate are at such a low at the moment. Does refinancing make since to you? And if it does where do you go from there as far as which loan option to choose from because there are so many out there. Net benefit may be able to help you make all the right choices for your financial situation.
Net benefit helps and represents the impact of your personal finances all the way to refinancing your mortgage. Net benefit is different in all situations depending on length of loan, the rate of your interest, and loan type. You need to compare at least two loans before you can make the correct decision of which one to choose.
There are a few different factors that determine the net benefit. Some factors are how many payments have been paid already and what your ending balance is. There are some cases where your net benefit will be higher if you paid of more overall balance in a shorter period of time decreasing your overall balance. However other cases your net benefit would be higher if your loan was extended and you took longer to pay off entire balance. Determining your time period depends on your long term plans with your current home. Are you selling in the future or wanting to rent it? These also determine what your net benefit will be.
Here is two different scenarios that will hopefully help you determine what the right route to take for your situation is. Let’s Say Todd and Amy are thinking about refinancing with a mortgage balance of $300,000 and interest at 6.124% which makes their monthly payments $1,907. Let’s say example one they refinance to a 40 year fixed loan, their rate goes to 5.500% and makes their payment $1,547 which saves them $360 a month. After 10 years of this scenario they would have saved $60,576. Because of less interest they build up less equity and will owe $34,550 to the bank in the end. So in the end that makes their net benefit of $26,026. That comes from savings of lower payments.
Now for scenario number two, the same couple goes with a 15 year fixed mortgage with a 4.250% rate that makes their payment $2,257 a month. This increases their payment $350 a month. After 10 years they will spend $59,853 more than if they would have stuck with their original mortgage. But by paying off loan faster they will build up more equity and owe the bank $116,169 less. That makes their net benefit $56,316 which comes from getting more equity and paying off loan quicker which means paying less interest.