There are a lot of complex issues associated with home loan refinance and these should be carefully examined before making a decision. You need to consider the interest rate and whether it is likely to rise or fall in the near time, the costs and charges associated with ending a loan agreement and beginning a new one, and the conditions associated with both the new and old loans. A Your Local Finance broker will design a refinancing plan to both meet your needs and help save your hard earned dollars.

Making Sure you Break Even

The calculation of the “break-even” point is critical. This refers to the point where profits and expenses are equal. With a home loan refinance it is the point where you start to save money on your new loan, after the savings from a reduced interest rate have covered all the costs of switching loans in the first place.

When refinancing your mortgage, your costs are the expenses of ending your loan term early and refinancing, and savings on interest represent your profits. When the profits equal the expenses you will start to make savings.

So if the total fees and other costs for changing mortgages is $2000, but because Your Local Finance broker got you such a good deal, you’ve been saving $200 a month in interest, the break-even will occur in 10 month.  From month 11 you start to benefit from very real savings – you are finally getting ahead!  TIP: Smart home owners and investors continue paying that $200 a month saving in order to pay down their loan faster.

Break Even Traps

The above calculation does not take into account a few other factors. Firstly, if you choose to refinance over a longer term, the monthly repayments will reduced markedly, but the costs will be higher. For example, if your current loan is over 30 years but you have 25 left, the costs for refinancing with a new 30-year loan will be lower. But the total interest you pay over the lifetime of the new loan, and the costs, may actually cost you more than if you did not refinance. So consider both the total interest paid over the term of the loan and the change in monthly repayments.

You may want to investigate the option of making higher monthly repayments that may shorten the life of the loan and reduce the interest you have to pay. In this situation the break-even point is when the total loan cost becomes less than it would have been if you had not refinanced.

It can get confusing, but the important thing to remember is to look at the total lifetime of the loan.  If you feel like you could use some assistance to properly understand how the concept of break even affects your mortgage, contact a Your Local Finance broker today.

What about Costs?

If you are tight for cash, you or your lender might suggest rolling all the refinancing costs into the new loan.  But this doesn’t mean that you have avoided paying them.  In fact, quite the opposite.  You have only deferred paying these fees and are now paying interest on the fees for the life of the loan!

Lenders may also offer a “no cost” refinance, where you pay a little higher interest rate, in return for the lending institution being responsible for the costs, thereby reducing your monthly payments. You need to be careful to ensure that these loans are really of benefit to you. No-cost refinancing may suit you if occupying the refinance house for a relatively short period of time, or if the closing costs are included in the loan.

It definitely can be a minefield for the unwary.  Why not contact a Your Local Finance broker for a casual discussion on what refinance strategy might work best for your circumstances.