Home prices in the Seattle metro area have risen sharply over the last couple of years, boosting equity levels for homeowners. Meanwhile mortgage rates are still very low. As a result, now could be a good time to refinance a mortgage loan in Seattle.
The question is, would refinancing work to your advantage? To figure that out, you’ll want to calculate your break-even point. This article explains how to go about it.
Home Equity Rising Across the Seattle Area
Equity is the value of the ownership you have in your home. It’s easy to calculate. Just subtract (A) the amount you currently owe on your mortgage from (B) the current market value of your home, and you’ll have an approximation of your home equity.
Your equity changes over time, due to market conditions as well as the gradual reduction of your mortgage debt. When home prices rise, homeowners tend to gain equity.
This is what’s happening in the Seattle area right now. House values in and around the city have risen by double digits over the last year, and more gains are expected through 2017. This means homeowners are acquiring more equity as well.
Thirty-year mortgage rates, meanwhile, continue to hover below 3.5% on average. With prices rising and mortgage rates still low, now could be a good time to refinance a home in Seattle.
But how do you know for sure? Well, a mortgage company can run the numbers for you. (We would be happy to do this for you.) But you can also do it for yourself. For starters, you’ll want to figure out your “break-even point.”
Is Now a Good Time to Refinance in Seattle?
Seattle homeowners refinance their homes for different reasons. Some do it to convert equity into cash. Others do it to switch from adjustable to fixed-rate mortgage loans, or to shorten the repayment term. But the most common reason for refinancing is to secure a lower mortgage rate and save money over time.
It begs the question: How do you determine if refinancing is worth it? After all, you’ll probably pay closing costs on the new loan, just like you did the first time around. So how do know when the benefits of refinancing outweigh the costs?
The answer lies within the break-even point. This is the point at which your savings begin to exceed your upfront costs.
To determine if a mortgage refinance makes sense for you, you’ll need to know two important numbers:
- How much will you pay in closing costs on the new loan?
- How much will you save each month after refinancing?
With these numbers in mind, you can do the math to determine whether or not a refinance will work to your advantage. So let’s talk about that next.
Mortgage Scenario: Calculating the Break-Even Point
If you’ve ever taken a class in finance or economics, you’ve probably heard the term “break-even point.” In a financial context, this is the point where the money gained or saved by a certain action begins to exceed the money spent.
Mortgage refinance has a break-even point too. And if you’re refinancing for the primary purpose of saving money over the long term, you need to know where it lies.
Here’s a real-world refinancing scenario:
John and Jane are planning to refinance their home in Seattle. Their loan officer says they’ll end up saving $100 per month after refinancing, by securing a lower interest rate on the new loan. That’s all well and good. But they’ll also end up paying around $3,000 in closing costs. Using these two numbers, the couple can calculate their break-even point to find out if (and when) refinancing will benefit them.
Here are the steps they would take:
- Determine the total cost of refinancing ($3,000 in this case).
- Determine the amount of monthly savings after refi ($100 per month).
- Divide the cost of refinancing by the monthly savings (3,000 / 100 = 30).
The answer (30) is the number of months it would take the couple to reach the break-even point. So in this scenario, John and Jane will break even 30 months after refinancing the loan. That’s the point when their savings (brought on by the lower mortgage rate) will begin to exceed the amount they paid in closing costs and fees.
Here’s the basic formula: Costs divided by savings equals break-even point.
Of course, this assumes you’re refinancing your Seattle home primarily to save money over the long term, which is the most common strategy. If you’re refinancing to pull cash out of the home, or to pay off the loan sooner, there are other considerations as well. But we’ll save those lessons for another day.
We Can Help You
This is a simplified overview of the refinancing process. Every lending scenario is different, because every borrower is different. Your situation may differ from the examples presented above.
If you would like to know if it makes sense to refinance your Seattle home, please contact our knowledgeable staff. We can help you run the numbers to find out if refinancing would work to your advantage.