What happens when you are selling and looking to purchase a home simultaneously? The answer: is a little more complicated than you think.
Summary: Home prices in the Seattle metro area have risen sharply over the last couple of few years, boosting equity levels for homeowners. With mortgages rates currently very low, now might be a great time to refinance. This article will help you determine if 2020 is the year for you to refinance.
The median price of homes in Seattle has stalled recently, though they’ve spiked over the past few years. This has helped homeowners boost their equity in their homes. 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?
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 in the recent past, and some gains are expected through 2020. This means homeowners are acquiring more equity as well.
Thirty-year mortgage rates, meanwhile, continue to hover around 3.5% – 3.65% 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.
Curious About Refinancing in Seattle?
If you would like to know if it makes sense to refinance your Seattle home, get in touch with Sammamish Mortgage. We are a family-owned and operated Mortgage Company who has been proudly serving the Pacific Northwest for 28 years. We currently lend in all of Washington, Oregon, Idaho, and Colorado and offer many mortgage programs with flexible qualification criteria. Get in touch our knowledgeable staff today!