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When Will Refinancing Pay Off? Calculating Your Break-Even Point

December 24, 2024 by Kay Monigold

Refinancing can help homeowners save money, but it’s essential to determine if the potential savings outweigh the upfront costs. One key tool in making this decision is calculating the refinance break-even point. This simple calculation reveals how long it will take for your monthly savings to cover the costs of refinancing. Here’s everything you need to know about determining when refinancing will pay off.

What Is the Refinance Break-Even Point?

The refinance break-even point is the time it takes for the savings from lower monthly payments to equal the total costs of refinancing, such as closing fees and other expenses.

For example, if your closing costs are $4,000 and you save $200 per month, your break-even point is 20 months.

If you plan to stay in your home beyond the break-even point, refinancing can offer substantial long-term savings.

How to Calculate Your Break-Even Point

  1. Determine the Total Costs of Refinancing
    Refinance costs typically include:
    • Loan origination fees
    • Appraisal fees
    • Title search fees
    • Attorney fees

These costs generally amount to 2-6% of the loan amount.

  1. Calculate Monthly Savings
    Subtract your new monthly mortgage payment from your current one. For example, if your current payment is $1,500 and your new payment is $1,300, your monthly savings are $200.
  2. Divide Closing Costs by Monthly Savings
    Use this formula:
    Break-Even Point = Total Closing Costs ÷ Monthly Savings
    Example: If your closing costs are $4,000 and your monthly savings are $200, your break-even point is 20 months.

Factors That Influence Your Break-Even Point

Several factors affect how quickly you reach your break-even point:

  • Interest Rates: A larger rate drop leads to higher monthly savings, shortening the break-even time.
  • Loan Term: Shortening your term may delay the break-even point but reduce long-term interest costs, while extending it may lower monthly payments and speed up the break-even time.
  • Closing Costs: Higher closing costs lengthen the time it takes to recoup your expenses.
  • Loan Amount: Larger loan amounts tend to offer greater savings potential with lower rates.

When Does Refinancing Make Sense?

Refinancing might be a good choice if:

  • You plan to stay in your home for several years.
  • You can secure a significantly lower interest rate.
  • You want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM).
  • You want to lower your monthly payments or pay off your loan faster.
  • You need to access home equity with a cash-out refinance.

Common Mistakes When Calculating the Break-Even Point

To ensure accurate calculations, avoid these common pitfalls:

  • Forgetting to include property taxes, homeowners insurance, or mortgage insurance in your calculations.
  • Failing to align refinancing with your broader financial goals.
  • Overestimating how long you’ll stay in your current home.

The Long-Term Benefits of Refinancing

Once you pass the break-even point, the monthly savings from refinancing can add up to significant financial benefits, potentially saving you thousands over the life of the loan. However, resetting your loan term may extend repayment time, so it’s essential to weigh the pros and cons.

Filed Under: Mortagage Tips Tagged With: Home Finances, Mortgage Refinance, Smart Savings

Mortgage Assistance Programs and Government and Nonprofit Options

December 4, 2024 by Kay Monigold

Purchasing a home is a significant financial milestone, but for many potential buyers, the upfront costs and down payment can be a barrier. Fortunately, there are a variety of mortgage assistance programs available through government agencies and nonprofit organizations to help low- and moderate-income homebuyers achieve their dream of homeownership. These programs can provide financial assistance, lower interest rates, or other benefits to ease the burden of purchasing a home. Here’s an overview of the key options available to you.

1. Federal Housing Administration (FHA) Loans

The FHA loan program is one of the most well-known and widely used government-backed mortgage options. It is designed to help first-time buyers and those with lower credit scores qualify for home loans. FHA loans require a smaller down payment—usually as low as 3.5%—making it easier for low- to moderate-income buyers to enter the market. The program also offers more flexible credit score requirements compared to conventional loans.

2. USDA Rural Development Loans

If you’re interested in purchasing a home in a rural or suburban area, the USDA Rural Development Loan could be a great option. This program is designed to help low- and moderate-income buyers who are purchasing a home in designated rural areas. USDA loans require no down payment and offer low, fixed interest rates. The eligibility requirements are based on income and location, so check if your desired property qualifies.

3. VA Loans

For eligible veterans, active-duty service members, and certain members of the National Guard and Reserves, VA loans offer some of the most advantageous terms available. These loans require no down payment, no private mortgage insurance (PMI), and often have lower interest rates than conventional loans. VA loans are designed to make homeownership more accessible for those who have served in the U.S. military.

4. State and Local Government Programs

In addition to federal programs, many states and local governments offer their own homebuyer assistance programs to support low- and moderate-income buyers. These programs may include down payment assistance, grants, or special interest rates. They can vary widely by location, so it’s essential to research what’s available in your area. These programs are often designed to make homeownership more affordable for first-time buyers.

5. Nonprofit Programs

Numerous nonprofit organizations offer homebuyer assistance programs, including grants, down payment assistance, and affordable housing options. Organizations like NeighborWorks America and Habitat for Humanity can provide support for qualifying homebuyers. These nonprofits often partner with lenders and other organizations to provide more favorable financing options for those in need.

6. Homebuyer Education Programs

Many mortgage assistance programs require or encourage participation in homebuyer education courses. These programs help educate buyers about the home buying process, financial management, and maintaining homeownership. Completing a homebuyer education course can help you qualify for certain assistance programs and ensure that you’re financially prepared for homeownership.

7. Down Payment Assistance Programs

One of the biggest hurdles to homeownership is coming up with a down payment. Fortunately, many programs offer down payment assistance in the form of grants, forgivable loans, or second mortgages. These programs can help cover the down payment or closing costs, allowing you to purchase a home with little to no upfront cost.

Mortgage assistance programs offered by the government and nonprofits are designed to make homeownership more accessible for low- and moderate-income buyers. From FHA and USDA loans to state-based programs and nonprofit grants, there are a variety of resources available to help you buy your first home or upgrade to a new one. Be sure to research and connect with us so we can help guide you through the available options and find the program that best fits your needs.

Filed Under: Mortagage Tips Tagged With: Down Payment Assistance, FHA Loans, Mortgage Assistance

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Our Team

Kay MonigoldKay Monigold
Owner/Mortgage Broker/Residential Mortgage Loan Originator
NMLS#1086176

Steven LoweSteven P Lowe, Sr
Residential Mortgage Loan Originator
NMLS #1085638

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