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Should
You Refinance Your Home Mortgage?
Housing costs are
one of the largest components of most household budgets. With interest
rates changing so frequently, you should periodically determine whether
refinancing at current interest rates would save you money.
To determine whether
you should consider refinancing, you need to compare the costs of obtaining
a new mortgage with the savings you will enjoy with a reduced interest
rate. You my also want to consider refinancing to a different type of
mortgage, such as switching from a 5 year balloon to a 15 year fixed rate
mortgage.
Here is an example
and a worksheet that will help you determine if refinancing makes sense
for you. You may want to print this article and use the worksheets. Rick
and Carol have a home they bought 3 years ago for $300,000 and they have
5 years remaining on balloon mortgage of $200,000 with an interest rate
of 6.25%. Their monthly payments are $1231.43. They intend to live in
their home for several years and would like to lock in a 30-year mortgage
with a 6.25% fixed rate.
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Rick
and Carol's Example
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New
Mortgage Costs
|
| Discount points (in $) |
$ - |
| Origination points (if any) |
$1500 |
| Application fee |
$ 475 |
| Credit check fee |
$ - |
| Attorney fees (yours) |
$ - |
| Attorney fees (lender's) |
$ - |
| Title search fee |
$ - |
| Title insurance fee |
$ - |
| Appraisal fee |
$ - |
| Inspections |
$ - |
| Local fees (taxes, transfers) |
$ - |
| Other fees |
$ 360 |
| Total cost of new mortgage |
$ 2335 |
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Calculating
the Savings
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| Monthly payment
on current mortgage |
$1231.43 |
| Monthly payment
on new mortgage |
$998.57 |
| Difference between
two mortgage payments |
$232.86 |
| Divide total
fees on new mortgage by monthly savings - This is the number
of months to recover your costs. |
10
months |
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In
this example, Rick and Carol would save over $2800 annually in mortgage
payments and lock in a 30 year fixed rate mortgage. Over the course of
the mortgage they would pay about $83,000 less in total interest.
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Worksheets
for your use
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New
Mortgage Costs
|
| Discount points
(in $) |
$ |
| Origination points
(if any) |
$ |
| Application fee |
$ |
| Credit check fee |
$ |
| Attorney fees
(yours) |
$ |
| Attorney fees
(lender's) |
$ |
| Title search fee |
$ |
| Title insurance
fee |
$ |
| Appraisal fee |
$ |
| Inspections |
$ |
| Local fees (taxes,
transfers) |
$ |
| Other fees |
$ |
| Total cost of
new mortgage |
$ |
|
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Calculating
Your Savings
|
| Monthly
payment on current mortgage |
$ |
| Monthly payment
on new mortgage |
$ |
| Difference between
two mortgage payments |
$ |
| Divide total
fees on new mortgage by monthly savings - This is the number
of months to recover your costs. |
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There
is a mortgage refinancing calculator as part of this website that can
make the calculation easier. There is also a mortgage payment calculator
that will calculate your monthly mortgage payment for any size mortgage
with any interest rate.
Other considerations
When reviewing the feasibility of refinancing, you may also wish to consider
refinancing a larger or smaller amount than the current balance of your
mortgage. If you have excess funds available and believe you will have
a hard time earning a return greater than the mortgage rate, you may want
to pay down your mortgage and get a new mortgage that is smaller. If you
have other liquidity needs, you may want to refinance a larger amount
to free up some of the equity in your home.
Remember that mortgage
interest is tax deductible if you itemize your deductions on your tax
return. Consult your tax advisor to see how this may apply to your situation.
Final thoughts
No interest rate environment lasts forever. Unfortunately there is no
crystal ball that will tell you when rates have reached their lowest level.
Taking action now to evaluate whether refinancing now makes economic sense,
and evaluating the type of mortgage you want can help you be in control
of one of your largest household expenses.
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