To simplify refinancing your home and to decide if it is beneficial for you to do so you must first understand cost of money over time.
Every month you make a mortgage payment you are essentially re-purchasing your home at (your current loan balance $$$ and current rate %%%). If you are in a position to refinance you are making a decision to re-purchase your home at a lower cost.
Most consumers don’t refinance because they cannot justify the closing costs involved and end up making their decision not to refinance based purely on costs.
If you were looking to purchase a new home today and there were two identical homes for sale with fixed financing attached which one would you choose to purchase?
Home #1 Home #2
$100,000 @ 6.625% $104,000 @ 4.625%
Monthly Payment = $640.31 Monthly Payment = $534.71
Finance Charge = $130,512.52 Finance Charge = $88,491.77
Total cost of home = $230,512.52 Total cost of home = $192.491.77
First reaction for most consumers is to buy the home with the lower sales price. What most people don’t understand it is not the sales price that matters most; it is the cost of the money borrowed.
Understanding cost of money will help you make an educated decision. This example also represents the same decision you will be faced with when the opportunity presents itself to refinance; Home #1 representing your current loan and Home#2 refinancing your home at a lower rate and rolling the closing costs (est. $4,000) into the new loan.
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