Home Loans: There are many great reasons to refinance your home loan and it may be a wise financial decision. Some of the more popular reasons to refinance include lowering your interest rate, lowering monthly payments, debt consolidation and decreasing the home loan term to build equity quicker.
But, before you decide to refinance you need to the sums to determine if the cost of refinancing would be worth. Keep in mind that if your goal is to save money, you to calculate your break even point. Your break even point is the point where your savings covers the cost of refinancing a home loan.
As a rule of thumb, the longer you intend on staying in your home the more feasible it will be to consider refinancing.
It is a fairly simple calculation to determine your break even point which will help you to figure out when you will start saving money.
Add up the costs (prepayment penalties, registration costs etc.) of refinancing your home loan and divide the total costs by the amount you save each month. This will show you the number of months it will take before you start seeing real savings.
For example, if you refinance your home loan and your closing costs end up to be R14,500. Also your mortgage payment have gone down from R4,900 to R4,000 which translates into a R900 monthly saving. Divide the R14,500 by R900 which means that it will take you 16 months to break even.
This is a fairly simple explanation, but it should help you to calculate if you should refinance your home loan or not. In the above example if you plan on staying in your home for longer than 16 months it will be a wise decision to refinance.
To find out more about home loans and other possible pitfalls you're likely to encounter, visit our website through the links.
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