A home refinance is a tool you have access to that has the potential to save you money. In fact, it has the potential to save you a lot of money, thousands of dollars. However, just because there is potential doesn’t mean that with every refinance you’re going to save. Many homeowners wonder, ‘should I refinance my home after ten years?’ or five years or twenty years. There is no set in stone, cut and dry answer to this question, but if you pay attention to the many different facets of the refinance you’ll be able to make the decision for yourself.
Your Amortization Schedule
As a general rule of thumb, a refinance will have a greater impact on the amount of money you can save if it is done early on in your loan. That’s not to say that it won’t have an impact later, it’s just more impactful near the beginning. The reason for this is because of the way the interest is paid down over time. I invite you to go over your amortization schedule and see how much interest is being paid out in the first five years of the loan vs. the amount that is being paid out in the last five of the loan. The difference is drastic. What happens on a home mortgage is the interest is paid out first, so the principle decreases very little during the first 5-10 years. After a significant amount of interest has been paid, the monthly payment will start to have a greater impact on the principle, and you’ll see the amount start to drop. Here is the dilemma in this process, you refinance, get a new loan (because a refinance is a new loan), and start the process over, paying more out to interest than principle.
I Want to Refinance My Home for Better Terms
The power of the refinance lies in the ability it gives you to adjust your loan terms. As mentioned before, it is most impactful if done near the beginning of your loan, simply because by that point you are still paying more on interest than principle. That doesn’t mean that a refinance will never be beneficial after the ten-year mark, but it does mean that in order for it to be beneficial you need to seriously adjust some terms. So start with the interest rate, this will be your biggest motivator for the refinance. Ten years ago the average interest rate was hovering somewhere around 6.5%, a little lower for some, a little higher for others. Today, the average has been sticking closer to 4%. When you refinance, if you can secure the average rate today, dropping your mortgage rate by two points, you may see a significant change. However, your monthly payment, the time left on your loan, the amount of money you pay for closing costs, and points for the refinance will all have an impact on your new loan. This can weigh out whether or not the refinance will save you money or whether you’ll pay more, in the long run.
Do the Math
The best way to get a basic idea of the possible savings you’ll experience from a refinance after ten years is to find a refinance calculator and plug in some numbers. Refinance calculators enable you to put in all of the relevant loan information such as the principle balance, the interest rate, mortgage payment, closing costs, etc. These calculators then crunch the numbers and tell you what can be saved or what will be spent in getting the refinance done. This is a great way to get a snapshot of the potential on refinance.