The total of interest paid over the life of a mortgage can double or triple the original amount of the loan. The main reason for refinancing is to lower the interest rate and reduce the sum of interest billed over the life of the loan. If the current mortgage interest rate is lower than what you are paying now, you should consider refinancing
Evaluate if you have enough equity in your best home mortgage to qualify for refinancing. The house must be worth at least more than the mortgage balance. Twenty percent or more equity – impaired home mortgage value balance – is ideal. Equity of 5 to 20 percent will allow refinancing with mortgage insurance.
Look for current representative rates for the best home mortgage. The websites of the major national banks will provide mortgage rates for your area. Find the rates for a 30-year fixed-rate loan, a 15 year fixed rate loan and a 5/1-adjustable-rate mortgage (ARM). For example, at the end of June 2011, Wells Fargo was quoting 4.5 percent for a 30-year fixed-rate mortgage, 3.625 percent for the 15-year fixed-rate mortgage and 2.75 percent for an MRA. 5/1.
Calculate the monthly payments using the current mortgage interest rate and the balance of your mortgage using an online mortgage calculator such as that of Bankrate com (see Resources). Using the rates in Step 2 and a $ 200,000 mortgage balance, payments for all three types of mortgages are:
- 30 years fixed: $ 1,023.38
- 15 years fixed: $ 1,242.47
- 5/1 ARM: $ 817,48
Compare your current principal and interest payment amount with payments at current rates to determine the monthly savings if you refinanced. For example, if you have a five-year period, from a 30-year mortgage to 6 percent, your current payment is about $ 1,290. Refinancing to a new 30-year fixed would save $ 277 a month and the 5/1 ARM would save over $ 470.
Estimate the closing costs for a new loan. The 2010 Bankrate.com study of closing costs produced a national average of $ 3,700 for a new mortgage of $ 200,000 and the lowest state was $ 3,000. As an estimate of closing costs, use $ 4000 if your loan is less than $ 200,000 and 2 percent of the loan amount for larger loans.
Divide the estimated closing costs by the monthly payment savings to calculate the number of months to regain the closing costs. For the example used, $ 4,000 $ 277 divided by product 14 months for a fixed-rate loan and nine months with the ARM 5/1. If you plan to keep the house longer than the calculated number of months, it makes sense to refinance your loan.
Tips & Warnings
The steps here are to determine if refinancing makes sense in your circumstances. The actual figures of a mortgage lender for payments and closing costs will determine the actual savings from refinancing.
Get payment and closing costs from the quotes of several lenders before giving a money lender and committing to a refinance.
Consider refinancing a 15-year mortgage if you currently have a longer-term remaining on your mortgage and the 15-year payment is close to your current payment. Reducing your mortgage term from five to 10 years or more will save a large amount of money on the total cost of the mortgage.
If you have less than 20 percent equity in your best home mortgage, a new mortgage will require mortgage insurance, increased monthly payment and possibly reduce monthly refinancing savings.
The monthly payment on a 5/1 ARM is only defined for the first five years. Then, the payment can go up significantly if the short-term interest rates are higher at this time. Use only this type of loan to refinance if you understand what could happen to the payment after five years and you can afford a higher payment if rates do not increase.