Refinancing Mortgage Loans - Information and Advice

"Get the lowest refinance mortgage loan rates and best loans."

Refinancing Mortgage Loans: With "everyone" talking about the historically low mortgage rates you are ready to decide if it "pays" to refinance. The "rule of thumb" supplied by mortgage companies is to refinance if you can reduce your interest rate by 1%. But there is more to it than that. Realistically, the first thing you need to determine is what rates do you qualify for and what are the other costs like points and fees. Click here to check current rates for refinancing mortgage loans.

When refinancing it is common to roll the additional costs and fees back into the mortgage so there are no "out of pocket" costs. But this allows the Bank or other mortgage holder to charge you interest on these fees.

At the current low interest rates and if you choose a short time period for your mortgage the additional interest will be relatively small. But even at these low rates, if you have a 30 year mortgage, interest will end up doubling the amount paid over the 30 year life of the loan.

Refinancing Mortgage Loans Example

Assume you took a 30 year, $115,000 first mortgage on a house 5 years ago. The interest rate at the time was 7.5% and your principal and interest payment was $765.10 per month. If $765.10 sounds low to you, remember your "actual payment" may also include mortgage insurance, taxes and home owners insurance.

After paying $765.10 per month or $9181.20 a year for 5 years, you have paid a total of $45,906. Plus, you still owe about $108,000 on your $115,000 mortgage and you still have 25 more years to go! Not much of your payment is going toward principal!

So the sooner you can get out from under the better.

Low Current Rates Free Up Cash

Recently interest rates have fallen to around 5% so you are considering refinancing mortgage loans. Assuming closing costs, fees and expenses are about $3,000. you will have to "borrow" $111,000 to pay off your $108,000 loan or come up with the $3,000 from savings.

If you decide to refinance the additional costs for another 30 years... your loan amount would be $111,000 and you would be almost back to where you started 5 years ago... but your payment would drop to $595.87 for a monthly savings of $169.23

Although it might be nice to have an additional $169.23 to spend each month, the question is what will you do with the money? Go out to eat more, buy more toys? Invest it in your retirement fund? Or just "blow it"?

If you just "blow it"... all you have accomplished is that you are in debt to the bank for an additional 5 years. Not a happy prospect...

Refinance Mortgage For Shorter Term

What if you set the mortgage term to 25 years? In that case, your payment would be $648.89 saving you $116.21 per month. So for an additional $53.02 per month your mortgage term remained the same.

Personally, I think that is a better solution. At least you aren't pushing your retirement out an additional 5 years while you continue paying your mortgage.

Remember, the original question was... Is it worth it to refinance and pay the additional $3000. or just keep paying on the old mortgage?

Keep in mind, as soon as you sign the papers the equity you have in your house drops by $3000! Assuming you chose the 25 year mortgage (with the $116.21/mo savings) it will take you 25.8 months to break even ($3000/$116.21) because at that point you will have saved the $3000. it cost you to refinance.

So if you intend to stay in your house 3 or more years it would pay for you to refinance.

Refinancing For Shorter Term Example

But what if you took it one step further? What if you kept your payment the same and reduced the term of your mortgage as far as possible?

A $111,000 mortgage at 5% with a payment of about $765 would require a term of 223 months or about 18.5 years. Assuming you could get an 18.5 year mortgage and you intended to stay in your house that long, this would be an excellent move!

You have drastically reduced the amount of money you will pay the bank over the life of the mortgage and you are free and clear 6.5 years earlier!

Even if you move sooner, your equity will be building faster so you will have more money when you sell.

Unfortunately, lenders do not usually let you choose an odd term length like 18.5 years , so you would have to choose either a 20 year term with a payment of $732.55 which would still save you about $30/month but also knock 5 years off your loan (and build equity somewhat faster).

15-Year Refinance Mortgage Example

Or you could choose a 15 year term with a payment of $877.78 which would actually cost you about $110 per month more than what you are currently paying, but would knock a full 10 years off your mortgage.

If your income has risen since you got your initial mortgage and you could swing it... it would be money well spent.

For those with higher incomes who have difficulty saving, this is a great idea because it actually forces you to save a little bit more each month and once you get used to it, you won't even miss it.

Perhaps you can remove the mortgage insurance off your mortgage.

On the original loan, you might have to pay it for the first 10 years, so you would still have to pay it for 5 more years. But... if you have made improvements to the home... or property values have increased dramatically in your neighborhood... you might be able to get the new loan without the mortgage insurance.

If you can, you will save an additional $100/month! With that savings you can move to the 15 year mortgage without mortgage insurance for the same amount that you are currently paying for a 30 year mortgage with mortgage insurance. Not bad eh?

Whack 15 years off your mortgage just like that!

Borrow Less and Save More

Another way to reduce the monthly payment is to reduce the amount you borrow. If you could come up with the additional $3000 in closing costs from savings, your monthly payment on a 15 year mortgage would drop from $877.78 to $854.06 .. or only about $89. per month more than what you are currently paying.

Is it worth $89 a month to knock another 5 years off your mortgage? That depends on your personal circumstances!

If your budget is already stretched to the limit, or it will put you at risk if you lose your job, NO.

But if you can find a way to come up with $3.00 per day, perhaps by giving up cigarettes, or skipping a trip to the vending machine or to McDonalds, it will save you thousands over the life of your mortgage!

Refinancing Mortgage Loans - Related Pages

Refinancing Your Home - Advice on refinancing your home - Pros and cons of 15-year mortgage vs. 30-year loan - Check current refinancing rates online and get your best rate.

Refinance Mortgage - Complete overview of home refinance topic - Articles about refinancing your home or borrowing against your home equity. How to decide which refinancing loan option is best for you.

Refinance Home Loan Again - Information about refinancing your mortgage a second time - Tips on when it makes sense to refinance your home loan, no matter how new it is.

Refinancing Costs - Advice about mortgage refinancing costs and information about fees, points, closing costs and pre-payment penalties.

Mortgage Refinance Loan - Mortgage refinance loan information and tips on how to get the lowest home mortgage loan refinancing rate.

Mortgage Terms - Information on mortgage terms and what they mean in plain English - View mortgage rates and learn home equity borrowing tips.

No Cost Mortgage Refinance - Information and tips about no cost home mortgage refinance loans and how to determine which home refinance loan is best for you.

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