Mortgage Refinance:
when should you do it?

When is the right time for your refinance mortgage?

In this article, we will set "cost saving" as our reason for applying for a refinance mortgage, although there are other reasons for undertaking mortgage refinancing.

This guide will highlight a couple of the points you'll need to know about when you're deciding whether to refinance your mortgage or not.

Generally, you need to know what the interest rate you're paying on your mortage is. When mortgage rates start to go down, you may want to be ready to jump on it and take advantage of a lower refinance mortgage rate. But take note: it generally costs a couple of thousand dollars to refinance mortgage. Therefore you need to consider other factors before you make up your mind to grab the lower refinance mortgage rate.

Step 1 
You have to be sure about how many more years you are going to stay in the house for (let's say 13 more years, for illustration purposes).  

Step 2 
Calculate your cumulative interest cost for the next 13 years under your existing mortgage loan agreement. 

Step 3
Calculate the cumulative interest cost for the next 13 years with the new mortgage refinance loan (that will have a lower refinance mortgage rate).  The difference between these 2 cumulative interest costs will give you your expected interest cost saving (let's say this amount is $x).

But wait!  Don't rejoice yet.  Remember we have said that a mortgage refinancing exercise will generally cost you a couple of thousand dollars upfront (let's call this upfront cost $y)?  Your mortgage refinance will be a successful one only if your expected interest cost saving ($x) is larger than $y so as to give you a net saving.

Now, you may ask, why is it necessary for you to be first sure about how many more years you are going to stay in your house?  In this illustration, we have assumed your period of stay to be 13 years.  And let's suppose that based on this 13-year period, your interest cost saving ($x) is more than your upfront mortgage refinance cost ($y) to give you a net saving.  If you repeat steps 2 and 3 above to recalculate your cumulative interest costs based on a shorter period (say 8 years), you will find that your revised expected interest cost saving (let's call it $p) is reduced.  Now, when you compare your lower revised saving $p against the same upfront cost $y, your net saving will be less than that in the previous case; or you may find that your $p is now LESS than $y, resulting in a net LOSS.

To sum up, it is clear that your upfront cost ($y) of doing a mortgage refinance is the culprit. Because of this upfront cost, you should not hastily refinance your mortgage just because the refinance mortgage rate is lower than your existing mortgage rate.  You have to do some comparison as illustrated in the foregoing paragraphs.  Because of the upfront cost ($y), the number of years for which you are going to stay in the house becomes a relevant factor: if you don't stay in your house long enough, you will not accumulate enough interest cost saving to recover the upfront cost ($y) that you will have paid. Therefore, the lower the upfront cost, the sooner you will have a net saving.

Conversely, if the upfront cost was absent (ie $y=0), you would always have a net saving as long as your refinance mortgage rate was lower than your existing mortgage rate, regardless of how many more years you were going to stay in your house.

Related article: Refinance Mortgage with Your Current Lender - Should You?

Click here to discover how to quickly build a minimum of $40,000 worth of home equity and pay your mortgage off in 10 years or less without making biweekly mortgage payments.

[back to top]