The most common reasons for refinancing a mortgage are to lower the monthly mortgage payment and to lower the interest rate. There are a couple of things to consider when you have purchased a home and are considering refinancing. You need to consider how much money you are really going to save when you take into consideration that you have to pay closing costs and other fees in order to refinance.
Seasoning Period
Refinance
Most lenders have a clause, which is referred to as the "seasoning period." This means that you cannot refinance your mortgage until after the first or second year that you have lived in the home.
Early Payoff Penalty
Another cost factor that you need to be aware of is that your existing mortgage lender may charge you a prepayment penalty for paying your mortgage off early. If you refinance into a new mortgage, the existing mortgage is essentially paid off with the new mortgage and some lenders charge fees for this. Fees can range greatly, but are usually calculated as a percentage of your mortgage amount, which can cost you thousands of dollars.
Closing Costs & Fees
So before you refinance your mortgage it is important to calculate how long it is going to take you to breakeven or to recoup the amount of money that it is going to cost you to refinance (closing costs, prepayment penalties, etc.). This is especially important to calculate if you do not plan on being in the home for an extended period of time. As long as you recoup all of the costs that you will have to put into the refinance before leaving the home, then it may be a good time to refinance.
Breakeven Analysis Formula
Total amount of savings per month = # of months to breakeven
Total amount of refinance costs
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