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 Interest rates have been bouncing around a bit lately but sooner or later you might be tempted to explore refinancing your home mortgage. Maybe your coworkers are talking about the great refinancing deal they got. But just keep in mind that not everyone is in the same situation.
Refinancing a Mortgage
In fact, given the combinations of home costs, interest rates and closing date, chances are that your situation is very different that of a friend's. You see, everyone is in a unique situation when it comes to refinancing their loan. Not only because of their existing mortgage loan terms, but also because their future plans unique too.
All this information can be expressed in terms of a calculation that will give you a better understanding of the benefits of refinancing. It's just that you need to go over the numbers and vary your assumptions to figure out your best option.
Refinancing Options
Some of the things that are important inputs are the years you have left on your existing mortgage, closing costs and even how much longer you expect to be at the existing home. Understanding all these things will help you to make the right decision. Let's look closer at a couple of home refinancing scenarios.
Refinancing Examples
In this first scenario, let's say that you are thinking about refinancing an existing home mortgage of with an initial balance of $200,000 that is at 8.00%. Further let's assume that this is a 30 year mortgage with 10 more years remaining on the loan. Crunching through the numbers that means you've got about $121,000 of principal left to pay off on that loan. Let's say that you are looking at a 30 year, 6% refinancing loan to replace this mortgage.
Well, the good news is that your monthly mortgage payment will drop from around $1,470 to $720. But you will also making payments for 30 more years. If you had stayed with your existing mortgage, you would have paid another $178,000 with $55,000 in interest charges. Under the refinanced mortgage, you need to pay out another $260,000 of which $140,000 is interest charges.
In the example above you've lowered your monthly payment and have more money in your pocket, but over the long haul you will pay more.
Another variable to consider has to do with how much longer you plan on staying in the home. If you refinance an existing mortgage, it is very likely you will have to go through a formal closing. That means you'll be faced with closing cost fees such as attorney services, title searches / title insurance, and applications. In order to recoup all of these fixed fees or costs, you need to make sure you're going to stay in the new home long enough to make the closing worthwhile.
Working with Banks and Lenders
The good news is that lenders will help you work through the numbers if you know what to questions to ask. So here is short list of questions to think about asking a potential home mortgage lender:
- Considering all the fees and costs associated with refinancing my mortgage, how long do I have to stay in my home before I reach the breakeven point? (The breakeven point is where your savings have equaled your costs.)
- What are the total of my payments and interest charges for the remainder of my existing mortgage versus refinancing?
You should also talk to your mortgage company about things like prepaying your home mortgage. This is a strategy that can help lower the long term impact of refinancing.
Prepaying a Mortgage
For example, in the first scenario we discussed, the payment was lowered from $1,470 to $720. But if the homeowner was disciplined enough to continue paying $1,470 and applied the additional money to the loan's principal, then the 30 year mortgage would be paid off in about 8 1/2 years which translates into around $22,000 in payment savings versus the remaining 10 years on the original loan.
The point here is you need to be creative and disciplined to reap the different benefits of home mortgage refinancing. Don't be afraid to ask you lender to crunch through some numbers for you. Play out a couple of "what if" scenarios with the lender. The information you receive will allow you to make a better decision and after all, in the end you are the one left making the mortgage payments.
Online Mortgage Calculators
If you'd like to run through some calculations before you speak with a lender, we offer a complete line of online mortgage calculators that can help. These tools include mortgage amortization tables, a mortgage qualifier calculator and even a calculator dedicated to refinancing a mortgage. This last tool comes complete with instructions and will even show you the potential savings and cost you'll realize by refinancing an existing mortgage.
About the Author - Home Mortgage Refinancing
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