If let’s say your interest rate is 6% but you want to refinance to 4% and it costs 2% to refinance, doesn’t that just make it the same number in the end? Google says the cost of refinancing is roughly 2-6% of the full loan. I don’t get how it makes it cheaper to refinance? Just seems like you’re paying the money upfront then. Please eli5! Feel like I’m missing something.
In: Economics
To go along with others:
Does it make sense to refinance from X% to Y% APR? You have to do the math.
I bought a new house last year, with 5.75% APR for the first year, and then 6.75% going forward. I financed about $510k. I just did a VA Streamline refi down to 5.675%. I only had 1 year into the mortgage, so not much principal paid. In addition to the $10k refi costs, I had to pay VA Funding fee of ~$5k. So my new loan balance is ~$520.
But, the difference in payment will be ~$300/month. That means that it will take ~50 months (a little over 4 years) to make that difference worth it. If I was planning on selling (or was forced to sell) in < 50 months, or interest rates drop even lower in that time, then this refi will cost me money. If I stay here longer, then it was a good deal.
So, that’s what we used to balance the decision. Personally, I think 5% APR interest is here to stay, 3% was an abnormal situation. Time will tell if it was a good decision.
Latest Answers