Should I Refinance

Unless you are only looking at the costs of a refinance compared to the monthly and annual savings that can be achieved with a mortgage refinance, it is very difficult to answer the question posed, should I refinance?

The reason this question is difficult to tackle is that there are various reasons for why people choose to refinance their mortgage. All existing mortgage loan borrowers that are seeking to refinance their current home loan should carefully research the best option in each specific situation. However, some options are easier than others to determine the monetary benefits.

For existing mortgage loan borrowers that re trying to save money over the long term of their home loan and home ownership, the costs and savings analysis is very straight forward. A refinance that involves just changing the mortgage rate or the mortgage term is referred to as a rate and term refinance. Analyzing the breakeven analysis is the simplest method to calculate the costs and benefits of a rate and term refinance.

The calculations to determine if a refiannce makes sense for an existing home loan borrower will depend on three factors regarding the homeowner’s plans and the mortgage costs. You need to know how much you can reduce your current mortgage interest rate, how much you’ll pay in closing costs and fees and how long you plan to live in the home or keep the mortgage.

The key metric is the actual breakeven point which analyzes the new monthly mortgage payment compared to the existing mortgage payment to determine the monthly savings achieved with the refinance and the total costs to obtain the new mortgage loans.

By shopping and comparing mortgage rates and terms, you can determine the new mortgage rate for a refinance e and the costs to obtain the loan. Use this number to calculate the monthly savings divide the costs by the monthly savings to see how many months it takes to recover the costs of refinancing. That’s the number of months you should plan to keep the home after refinancing in order to recover your closing costs.

A twist to the breakeven analysis is concerns the term of the new loan which will almost always exceed the remaining term of your existing mortgage loan. Remember, refinancing will give you a brand new mortgage to pay off in contrast to an existing loan that may have several month or several years of payments already made.

Refinancing usually makes the most sense in the early years of your mortgage, when payments are primarily going toward interest or if the monthly mortgage savings are significant or if you refinance to a shorter term and avoid extending the repayment period.

Another reason people decide to refinance is for extra cash. This is what’s called cash out refinancing. Cash out refinancing allows a person access to a lump sum of money which can be used for just about any worthwhile purpose desired from home improvements to debt consolidation or even an exotic vacation.

While the idea of having extra cash is appealing, it is important to consider all of the options and costs. Borrowers that use a refinance for cash back may be making a very good financial decisions but it is important to evaluate long term goals and ramifications that would be affected by refinancing and not just the cheap cost of borrowing with a home loan.

Too many home loan borrowers have used refinance transactions in the past to consolidate debt or make various expenditures that resulted in a larger home loan amount are subsequently locked into mortgages not suitable for their financial situation. Remember that with a cash out refinancing, you are also increasing your overall level of mortgage debt.

Knowing precisely when is the perfect time to refinance is based on the low point for current mortgage rates are an almost impossible endeavor. The brightest minds in economics can’t agree where interest rates are headed in the coming months. That’s why many experts say if you find a good deal that saves you a significant amount of money; it’s probably not worth trying to beat it by predicting mortgage rate movements and the absolute low point of mortgage rates in the market.

To find current mortgage rate information on a variety of mortgage loans please refer to 15 year mortgage rates, 30 year mortgage rates, 10 year mortgage rates, FHA mortgage rates, jumbo mortgage rates or 20 year mortgage rates.

This entry was posted on Tuesday, May 31st, 2011 at 12:52 pm and is filed under Mortgage Information. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.