By lowering your mortgage interest rate through a refinance, you can save hundreds of dollars a month on your home-loan payment. But, refinancing when you're planning to move from your home shortly after the transaction can be complicated. You'll need to save enough money each month to make the refinance make sense. If you're moving soon, after all, you won't have as many months to pay off closing costs.
When you're moving in the near future, you want your monthly savings from a refinance to be as large as possible. If you are refinancing a 30-year fixed-rate mortgage loan of $200,000 with an interest rate of 6 percent, your monthly payment will stand at about $1,199. If you refinance that debt into the same loan but with an interest rate of 3.5 percent, you'll drop your monthly payment to about $898, a savings of about $300 a month, or $3,600 a year. But not all refinances bring the same amount of savings. If you refinance the same loan but only lower your interest rate from 4 percent to 3.5 percent, you'll only realize savings of about $56 a month or about $672 a year.
Pay close attention to the closing costs of a refinance if you are moving in the near future. These costs, along with your monthly savings, will determine how long it takes to realize any savings from your refinance. The closing costs you'll pay during a refinance vary according to your mortgage lender. The Federal Reserve Board, though, estimates that you can expect to pay from 3 percent to 6 percent of your loan's outstanding balance in such costs. If you're refinancing $180,000, you can expect to pay from $5,400 to $10,800 in closing costs.
How long it takes to recoup your closing costs and start enjoying your monthly savings depends upon your interest-rate drop and your closing costs. If your refinance saves you $3,600 a year and your closing costs run $5,400, it will take you less than two years to save enough to cover your closing costs. But if you only save $672 a year, it will take you slightly more than eight years to recover your closing costs.
If you plan on moving from your home shortly after your refinance -- say within one to five years -- you need to calculate how many months of loan-payment savings it will take you to cover the closing costs of your refinance. If it takes more months than you plan to stay in your home, then the refinance doesn't make financial sense. You can shop around with lenders licensed to do business in your state to find the one offering the lowest interest rate and closing costs. You are not required to work with the lender to which you are currently sending your monthly loan payment. However, if you can't find a lender that offers you a low enough rate and charges you lower fees, it might be wise to skip on a refinance if you plan on moving soon.
- Federal Reserve Board: A Consumer's Guide to Mortgage Refinancing
- Bankrate: When is it Worth it to Refinance?
- State Farm: Is Refinancing Worth It?
- Freddie Mac. "30-Year Fixed-Rate Mortgages Since 1971." Accessed August 28, 2020.
- Fannie Mae. "High LTV Refinance Option." Accessed March 9, 2020.
- Freddie Mac. "Understanding Relief Refinance." Accessed March 9, 2020.
- HUD.gov. "Streamline Refinance Your FHA Mortgage." Accessed March 9, 2020.
- U.S. Department of Veterans Affairs. "Interest Rate Reduction Refinance Loan." Accessed March 9, 2020.
- Consumer Financial Protection Bureau. "CFPB and VA WARNO: VA refinancing offers that sound too good to be true." Accessed March 9, 2020.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.