Refinance Your Mortgage and Save Big!
Written by Fiona Gu   


Refinancing your mortgage is not always necessary and beneficial, so measure the costs and benefits in advance. Keep in mind that refinancing can cost you additional fees from opening the new loan and leaving your current mortgage contract.


Some of the typical refinancing fees include the:
  • Application fee
  • Appraisal fee
  • Survey costs
  • Homeowner’s hazard insurance
  • Lender’s attorney’s review fees
  • Title search and insurance
  • Home inspection fees
  • Loan origination fees
  • Mortgage insurance


Things to consider:
  • Interest Rate: A refinance may help you obtain a lower interest rate, but this could extend the mortgage contract period. You could end up paying more interest due to the prolonged repayment stage.
     
  • Time Period: If you plan to live in your home for an indefinite amount of time, or long enough to obtain savings from a longer mortgage contract with lower interest rate, then refinancing is a good option.
     
  • Ability to Pay: If you simply don’t have the funds to make your monthly payments now, a refinance may be a good option to buy you more time – even if it means paying more in the long run.
     
  • Investment Returns: Just as in a prepayment consideration, it is important to compare the rate of return you could get on investments to the interest rate that you are paying. If the investments market is doing poorly and returning only 2%, but you are paying 6% on your mortgage, you may be better off allocating more funds to your mortgage and prepaying, or refinancing for a lower amount, and paying off the difference using your savings.


Making the Decision:

In order to determine whether it is necessary to refinance, you should calculate the minimum number of months it would require to break even with your closing payments. If the length of time you plan to live in your home exceeds that number of months, then refinancing is a good option. Contrarily, if the length of time you plan to live in your home is lower than that number of months, then you should not consider refinancing.

For example: Currently, you have a 30-year, $417,000 mortgage contract with a 5.75% fixed interest rate. So, your monthly payment is $2,433.50. You are considering of refinancing the mortgage contract at 5.00%. If you do, the new monthly payment is $2,238.55, and you can save $194.95 per month. Assuming that you paid $3,500 for the closing costs, it would take about 18 months to break even.

Minimum number of months to break even =  Closing Costs / Monthly Savings
Minimum number of months to break even  =  $3,500 / $194.95 = 18

Therefore, if you plan to live in your home for more than 18 months, you can consider of refinancing. However, if you do not, then refinancing would not be a good decision.

To further help you to engage a thorough understanding of refinancing, another example is provided below. This example shows you the potential monthly savings under different interest rates, as well as the minimum number of months to break even.

Example 2

A homeowner with a 30-year, $200,000 mortgage charging 8% interest would pay $1,468 each month.  The table below shows the potential monthly savings and the various break-even periods that would result from refinancing at different rates.  Assume that your closing cost is $2,000.

Rate After Refinancing
 New Monthly Payment
 Monthly Savings
 Months to Break Even
6.50% $1,264 $204 10
6.00% $1,199 $269 8
5.50% $1,136 $332 7
5.00% $1,074 $394 6
4.50% $1,013 $455 5
4.00% $955 $513 4
Source: Yahoo Real Estate

There are many websites that offer online calculators for you to determine the potential savings from refinancing. After you receive all the numeric values from your lender, you can input those numbers accordingly into the online calculators. In the end, you would be able to obtain the amount of money that you can save and the length of time you should live in your home (in order to benefit from refinancing).


Below are 3 online calculators that can help you with the calculations:
Lending Tree: http://www.lendingtree.com/mortgage-refinance/calculators/refinance-calculator/
Bankrate.com: http://www.bankrate.com/calculators/mortgages/refinance-calculator.aspx
My Fico: http://www.myfico.com/loancenter/refinance/calculators/refinancingcosts.aspx
Last Updated on Wednesday, 22 December 2010 05:25