28 Jul How Much Mortgage Can I Afford When Refinancing?
When taking that leap to buy your current home, it was at first essential to determine how much mortgage or house you could afford – before making offers on luxury digs that lay beyond your means. This qualifying process undoubtedly involved looking at the home prices in your ideal neighborhood, saving enough for a down payment, and showing an adequate household income to cover the monthly payment.
So, what happens if you purchased your dream home but the answer to the question “how much mortgage can I afford?” has since changed? Whether that amount is more or less than before, refinancing could be the right answer.
Financial Factors to Consider
While it may seem contradictory to refinance if your current financial situation means you can afford less than when you purchased, or likewise if you’re in the position to pay more on your current loan, hear us out.
The most popular reason to refinance is to take advantage of more competitive interest rates, especially when they’re as low as they are now. By shaving off even a fraction of a percentage rate, you can reduce your monthly payment and save more over the life of the loan.
If you find yourself in the enviable position of affording an increase in the monthly payment, then changing the mortgage term may be beneficial. By refinancing a 30-year loan into a 15- or 20-year program, you’ll not only pay off your principal faster but will typically be rewarded with better interest rates as well.
Changing the type of mortgage can also impact how much you can afford. If your initial loan was an ARM (adjustable rate mortgage), it may be time to refinance to a fixed rate loan for more stability. If you took advantage of FHA financing when you purchased, then it might be judicious to eliminate the private mortgage insurance (PMI) by rolling into a new conventional loan.
Perhaps you can afford your current mortgage but find yourself short on resources for something like higher education or some post-quarantine home improvement projects. By pulling equity from your home, you may qualify for a cash-out refinance to provide for these expenses.
In addition to interest rates, loan terms and home equity, you’ll need to consider the same personal financial qualifications as you did when first purchasing: payment history, existing debt, income and employment status.
How to Calculate an Affordable Mortgage
Thanks to a strong national housing market, chances are good that your home is worth more now than when you purchased it. When refinancing your existing mortgage, lenders will look at your home’s current value and how much the new loan will be, also known as loan-to-value ratio (LTV). In order to calculate how much you can refinance for, you’ll need the following information. The first few items will be found on your mortgage statement.
- Loan Balance
- Current Interest Rate
- New Interest Rate. You can estimate based on current rates but it will vary depending on your credit status, loan term, etc.
- Current Loan Term and Origination Year
- New Loan Term
- New Mortgage Amount (What you still owe.)
- Estimated Closing Costs (These vary by lender but typically range between 2 and 5% of the loan amount.)
An example of this calculation might look something like this:
Original loan from 2010 $200,000 for 30 years
Current interest rate 4.325%
New mortgage amount $192,000 for 30 years
New interest rate 3.575%
Refinance fees $6,000
There are two parts of saving to consider. The cash you’ll save each month with a lower payment, and the amount saved on the principal over the life of the loan:
Savings after refinance $122 per month; $82,029 over lifetime of the loan
The Real Question
There are many versions of online calculators out there to help you get an estimate of your potential loan and monthly payment scenarios, or you can get more informed numbers from competitive mortgage lenders like EnTrust Funding (ETF). They can also help you figure out your “breakeven” point – the ideal length of time to stay in the home and make up the total costs to begin saving in earnest. It’s about two years in the example above.
The real question isn’t actually how much mortgage you can afford when refinancing, but how much you can save. Our team at EnTrust knows these can be challenging times and will always have your personal goals and best interest in mind. How much can we help you save?