Home Mortgage Refinancing

Interest rates have been bouncing around a bit lately, so you might be tempted to figure out if it's time to refinance your home mortgage.  Maybe your coworkers are talking about the great refinancing deal they obtained.  It's great if they're happy, 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 than 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 make them unique too.

Fortunately, all of 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 going to take some time to go over the numbers, and vary your assumptions, to figure out your best option.

Refinancing Options

Some of the variables that are important include the years you have left on your existing mortgage, closing costs, and even how much longer you expect to be in your home.  Understanding all these things will help you to make the right decision.  Let's take a closer look 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 with an initial balance of $200,000 that is at 8.00%.  Furthermore, let's assume that this is a 30 year mortgage with 10 more years remaining on the loan.  Crunching through the numbers, this means you have 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 be 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 to stay 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 questions to ask.  So here is a 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?

Prepaying a Mortgage

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.

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 your 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 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.

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