Several months ago, I put Credit Sesame to work for me. Credit Sesame is an online program that scours the Internet and beyond to find better rates on mortgages, credit cards, or other debts you have. All you do is enter your information once and their system goes to work. The best part? It’s free … really, truly free. There was absolutely no cost and I didn’t even have to enter any credit card information!
Yesterday I was notified that the Credit Sesame system had recently evaluated 17,888 different scenarios and found several different mortgage loan refinance programs that I might be interested in. One was a 10/1 adjustable rate mortgage that would lower my payment by $137.22 per month with a 3.625% interest rate and another was a 30 year fixed mortgage with a 3.876% rate that would lower my payment by $65.88 each month.
Obviously, for anyone considering an adjustable rate mortgage, you should be certain you won’t stay in your home longer than the term of the loan in most cases. You also need to consider closing costs when examining a mortgage refinance. The easiest way to think about mortgage closing costs is in terms of “payback.”
How to calculate mortgage closing cost payback
It’s really simple. Simply take your total closing costs and divide by your monthly savings. In the first scenario above (with the 10/1 ARM), closing costs are estimated by Credit Sesame to be $2,080 and with savings of $137.22, the payback period would be a little over 15 months. Obviously, some people will want to calculate interest lost during that year and three months but with savings account rates at one percent (and even CD rates at 1.3 percent), there isn’t much point … maybe $20 to $24.
The second example doesn’t have such a rosy payback period — not only is the payment savings much less, but the closing costs on a fixed rate loan are substantially higher (not sure why). Closing costs were estimated to be $3,849 and with savings of only $65.88 per month, the payback period would be a discouraging 58 months … almost 5 full years.
An important consideration when refinancing to a lower payment
Save your savings … at least a part of your savings anyway. If you aren’t careful, you’ll adjust your spending requirements to absorb every thin dime of your monthly payment savings.