Buying a home and becoming home owners is a dream come true for many people and families. But most of the time, making such an expensive process involves borrowing money. A mortgage loan is very beneficial, and will help you become the owner of a home, but it will also affect your net worth, especially if you are refinancing. Refinancing a mortgage is a good way of lowering your monthly mortgage payment, but before you consider refinancing, you should take a close look at what you are getting into and ask yourself if this is only a temporary solution or one that will actually save you money.
How to Determine if Mortgage Refinancing is Worth It
The most widely used method of determining if mortgage refinancing is a good choice for you is by calculating a payback period. This is done by finding out in which month the sum of the monthly savings made by refinancing will be larger than the overall cost of refinancing. If reaching that sum takes less time than the amount of time that you will be living in the home, then you can conclude that refinancing is a wise choice.
Another way in which you can determine if refinancing your mortgage makes sense is to compare the amortization schedule of the original mortgage loan against the amortization schedule of the new loan, while including the refinancing costs into the equation. Then, subtract the difference between the two monthly payments from the new loan’s principal. Find the month in which the principal of the new loan will be less than the principal of the original loan. That’s when the economical payback period will be reached.
Will Refinancing Lower Your Net Worth?
Home owners refinance in order to reduce their monthly mortgage payment and free up money for other purchases or investments. While refinancing offers great benefits, its long-term effect is that it will have an influence on your net worth. Mortgages are considered good debt, but the balance sheet doesn’t differentiate between good or bad debt. Refinancing could make repaying your debt take longer and take thousands of dollars from your net worth over time.
Refinancing without lowering your net worth can be done by keeping the amortization the same and continuing to make the same or even larger monthly payments.
Home refinancing is an expensive process that, if you are not being careful, will lower your net worth. Before refinancing, try to compare the cost of refinancing against your savings. That is the only way of finding what kind of an effect will refinancing have on your net worth.
SOURCE:MORTGAGE RATES TODAY