Refinance Calculator Guide: Refinancing for a Smaller Monthly Payment

What’s not to love about the chance to reduce your monthly mortgage payment with the help of a refinance calculator? Countless Americans are loving it for sure since the country saw a rise in home refinancing in 2020. We witnessed a 200% jump in the total dollar value of refinancing in 2020’s second quarter compared to 2019’s Q2.

But is this option for everyone? If your goal is a smaller monthly payment, what you should be asking yourself is ‘How long will I remain in my home?’ Because while lower payments sound enticing, you are at risk of losing money if you refinance and sell the property before reaching the break-even point.

Read on to decide what to take into account when weighing the decision of refinancing.

Refinancing for a Smaller Monthly Payment in 2021

There has been a lot of talk of unprecedented and low interest rates recently. We have the Federal Reserve to thank for that. The central financial institution of the United States had to pull some drastic stops to keep the economy going in these turbulent times. Meaning, credit had to keep flowing. That led to historically low interest rates.

Reduced interest rates mean that people are scrambling to get their home mortgages refinanced in 2021. While some are loving the potential savings on their monthly mortgage payment, others are looking for that considerable payout from equity. Whichever category you belong to, you should always bear in mind the closing costs. The costs in questions are your responsibility. These expenses are crucial for determining the break-even point.

Bear in mind that it’s not uncommon to refinance to another mortgage of the same term (usually a new 30-year mortgage). A new mortgage usually brings more interest over the life of the loan. So although monthly mortgage payments would get reduced, the overall long-term expenses would probably rise. That is why you should assess your situation with a credit expert to make sure you are okay with these new expenses.

Now, back to the crucial break-even point.

Definition of Break-Even Point

When you refinance your loan, you pay hundreds or thousands of dollars in closing costs. A break-even point measures the time it will take for your accumulated savings to exceed the expense of the new loan. The earlier you reach this point, the more cost-effective the transfer will be.

Here’s a simple example of the break-even point:
$6000 in closing costs divided by $200 in monthly payment savings lead to 30 months to break even.

Always be on the lookout for predatory and fraudulent lenders that can add needless costs to your mortgage and lead to you overpaying on closing costs. They might keep mum about some of these expenses, hoping that you will be too engaged in the process to back out.

Refinancing for a Smaller Monthly Payment

How Long Does It Take For Saving To Exceed Loan Expenses?

You should keep the loan long enough for the savings to exceed the closing costs. That can take up to a few years.

That is a surprisingly long period, so the first thing you should ask yourself is ‘Am I planning to stay in this house long enough?’ Because, as we’ve said in the intro, if you opt for refinancing and then move to sell your house before breaking even – you will be at financial loss.

So if you belong to the category of those who are refinancing for a smaller monthly payment, you should carefully examine your expenses and aims. You need to be realistic about the period it will take you to break even.

How To Use a Refinance Calculator

Your refinancing costs usually amount to feels and closing expenses, some of them being:

Bank expenses: These include application expenses and possible discount points
Title expenses: Title search, insurance, etc.
Third-party expenses: Attorney costs, costs of credit reports ordered by the lender
Escrow expenses: For taxes, insurance, and more.

When looking for an appropriate lender who will give you a fair deal, look for more than one option. If you get multiple loan estimates forms that will detail the expenses, it will be easier to come to a decision.

The next important step is to estimate your break-even point. You can do this with a refinance calculator, for which you can do an online search.

But the basics of calculating your break-even point are dividing the overall loan expenses by the monthly savings. While it sounds simple enough like this, more often than not there is a lot of fine print involved to your closing cost agreement. Savings also vary if you prolong the term of the loan, for instance.

If it turns out that the number of months that you will be paying your new mortgage exceeds the number of payments you had on your original loan, that could incur bonus interest. So talk to a credit expert to see if it’s worth it and what your options are. They can also lead you into the nuances of using a refinance calculator, so you don’t fall into any traps set by creditors.

At White, Jacobs and Associates, our credit analysts also act as advisers. If you are wondering if refinancing is for you, and if you want to calculate your break-even point, don’t hesitate to book your free consultation today and find out more about using a refinance calculator.

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