How Much Can You Really Save by Refinancing Your Mortgage

If you're a homeowner, you've probably heard refinancing your mortgage could save you money. But how much can you really save, and is it worth all the paperwork and effort?

Here’s what to know about refinancing your home and some factors to consider before making a decision.

What is a mortgage refinance? 

A mortgage refinance is essentially paying off the remaining balance on an existing home loan and replacing it with a new mortgage – typically to lower the interest rate, adjust the length of the loan term, or tap into home equity.

Homeowners refinance for various reasons, including reducing monthly payments, paying off the mortgage faster, or switching from an adjustable-rate mortgage (ARM) to a fixed-rate loan.

How much can you save?

The amount you can save through refinancing depends on several key factors, including your current interest rate, new interest rate, loan balance, and remaining loan term.

Here are a few scenarios that highlight potential savings:

Lower interest rate: If you have a $300,000 mortgage at 6% interest and refinance to a 4% rate, your monthly payment could drop significantly. For example, on a 30-year loan:

• At 6%, the monthly principal and interest payment is about $1,799.
• At 4%, the new payment would be about $1,432.
• That’s a monthly savings of $367, or over $4,400 annually!

Shortening the loan term: Refinancing from a 30-year loan to a 15-year loan can save you tens of thousands in interest over time, although your monthly payment may increase. For instance:

• A $200,000 loan at 5% over 30 years would result in total interest payments of about $186,000.
• A 15-year loan at 3.5% would reduce total interest paid to about $57,000, saving you nearly $129,000 in interest.

Switching to a fixed-rate mortgage: If you currently have an adjustable-rate mortgage (ARM) with fluctuating interest rates, refinancing to a fixed-rate loan can provide stability and predictable payments, potentially saving you money in the long run if rates increase.

Factors to consider before refinancing

Consider the following to see if refinancing would be financially beneficial for you:

• Closing costs & break-even time: Refinancing comes with fees, typically ranging from 2% to 5% of the loan amount. Calculate how long it will take to recoup these costs through lower payments.
  
  Example: For a $300,000 refinance with 3% closing costs, the total closing cost would be $9,000. With a monthly savings of $367 (as calculated earlier), it would take approximately 25 months ($9,000 ÷ $367) to recoup the closing costs.
  
  
• Loan term reset: If you refinance into a new 30-year loan after already paying off several years on your current mortgage, you may end up paying more interest over time despite lower monthly payments.
  
  
• Credit score & debt-to-income ratio: Your ability to qualify for the best rates depends on your financial health. A high credit score and low debt-to-income ratio can help you secure the lowest rates.
  
  
• Future plans: If you plan to move in the next few years, refinancing might not make sense since you may not stay in the home long enough to recover the closing costs.

Refinancing your mortgage can be a smart financial move that saves you thousands of dollars, but it’s important to weigh the benefits against the costs. Before refinancing, crunch the numbers and evaluate your long-term financial goals. With planning, you can maximize your savings and take full advantage of the benefits refinancing has to offer.

From traditional home mortgages and refinances to construction and lot loans, Arizona Financial offers a variety of  home loan solutions for your needs.