A Refinance Calculator Will Help You Evaluate Interest Rates

By Richard Barrington
Calculators for Mortgages Columnist

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Although the news is full of stories about how mortgage lenders have tightened their loan qualification standards, some refinancing activity is still thriving. In particular, homeowners with good credit histories and substantial equity in their homes will find they are still very welcome with mortgage lenders. This gives those homeowners a viable option for financing life's special events. After all, no matter how carefully you budget, there will always be special events which fall outside the regular monthly expenses. Putting a child through college and paying for a wedding are common examples. On the less happy side, unexpected medical expenses and divorce settlements can exceed available resources. In any case, these are non-recurring events that may require special resources. This is when tapping into your home equity via cash-out refinancing may be a viable option.   Refinance Opportunities
Despite tighter lending standards, cash-out refinancing remains viable for a couple of reasons. First of all, homeowners who have built up a large amount of equity will have an easier time meeting today's lending standards. The key here is the loan-to-value ratio. After years of writing risky loans worth nearly as much (and sometimes more) than the underlying collateral, lenders today are more comfortable with loans that represent a smaller percentage of the home's value.  

Besides the opportunity for homeowners with substantial equity, there is also good news on the interest rate front. At a little over 6%, interest rates are at moderately low levels by historical standards, keeping the cost of borrowing reasonable.  

Evaluating Adjustable vs. Fixed Rate Mortgages
Cash-out refinancing means borrowing more than the existing mortgage balance in order to make some cash available for immediate use, but there is more to the strategy than that. One thing that must be evaluated is whether to use an adjustable or fixed rate mortgage.  

In general, if the plan is to pay back the loan over a long period of time, a fixed rate mortgage has the advantage of providing steady repayment amounts for budgeting purposes. However, if the plan is to repay the loan in a couple of years--either by selling the house or because a large influx of cash is expected in that time frame--an adjustable-rate mortgage may be more cost-effective because of the low teaser rate commonly offered.  

Using the Refinance Calculator
A refinance calculator can be the key to evaluating cash-out refinancing strategies. Not only can a refinance calculator make comparisons between your current payments and possible payments on a new loan, but it can also show you the total interest you'll be paying over the life of the loan. This means that you can not only budget using a refinance calculator, but you can also see the overall additional cost of borrowing and weigh the opportunity accordingly. This all comes down to responsible borrowing--using the money for extraordinary events, budgeting carefully for repayment, and knowing the total cost of borrowing.



About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.