Preparation is Key to Mortgage Refinancing

By Richard Barrington
Calculators for Mortgages Columnist

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A volatile interest rate environment increases the possibility that refinancing opportunities will occur, but it also means those opportunities can come and go in a flash. The best way to take advantage of a fast-moving market is to do a little advance preparation. One key form of advance preparation  is to familiarize yourself with how a refinance calculator works. A refinance calculator can quickly tell you how much you stand to save from lowering your interest rate, but it can also help with other refinancing goals as well.

Identify Your Goals

To use a refinance calculator correctly, the first step is to identify your goals. The following are three common reasons for refinancing: 

1. To lower the mortgage interest rate 
2. To reduce monthly payments by spreading the    balance out over a longer period. 
3. To access home equity via a cash-out refinancing.
   

Using a refinancing calculator in a slightly different way  in each case will give you information relevant to the respective goal.

Using a Refinance Calculator to Compare Interest Rates

The classic refinancing situation -- and really, the ideal  situation -- is when lower interest rates are available. Reducing interest  rates can both ease monthly payments and save money over the life of the mortgage.

    If interest rates have fallen since you closed on your existing mortgage, here are some key things to look at using a refinance calculator: 

• An apples-to-apples comparison of mortgage terms.    If you have 25 years left on your mortgage, use that time period as term    for the new loan. Otherwise the monthly savings on the payment won't reflect    the true savings offered by a new loan. For example, if a loan with 22 years    remaining and a $400,000 balance at 6.5% has a payment of $2,852, refinancing    that same amount at the same interest rate gets you a payment of $2,528.    It looks as though the new loan offers a $323 monthly savings. Of course    there really isn't any savings, the new loan just stretches out the existing    balance over a longer time period and so lowers the payments. There is nothing    wrong with lowering a payment this way, just don't confuse that with actual    savings. Even if you end up opting for a different mortgage length, this    base comparison will give you a truer picture of how much the lower interest    rate is saving you.
 
• A comparison between interest savings and fees.    There are likely to be fees associated with refinancing, so when you do your    apples-to-apples comparison, make sure your monthly savings will allow you    to recoup the cost of refinancing in a reasonable timeframe. Be sure to include    any refinancing penalties from your existing mortgage in this comparison.

Assessing a Longer Payment Period

Spreading your remaining balance over a longer period should  reduce your monthly payment with the trade-off being that it will cost you  more in interest over time. Use a refinance calculator to measure not just  the impact on the monthly payment but also to tell you how much stretching  out the balance will add to your interest charges. Knowing the total interest  cost will help you decide whether this budgeting tactic is worth it.

 

Measuring the Cost of Cash-Out Refinancing

Cash-out refinancing is an alternative way to access home  equity. It allows you to kill two birds with one stone -- refinance your remaining  mortgage balance while borrowing against your home equity at primary mortgage  rates. Since this does entail borrowing additional money, use a refinance  calculator  to  assess the impact on your monthly payments and overall interest expense, then contact  a mortgage lenderto  get started.



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