A Refinance Calculator Can Help You Avoid Higher Interest Rates

By Richard Barrington
Calculators for Mortgages Columnist

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The most confusing thing about a "to do" list can be prioritizing what gets done first. If refinancing is on your to-do list, there are strong arguments to be made for bumping it up to the top. The reason for the urgency is that refinancing is a 15-year or 30-year decision. A few experiments with a refinance calculator will quickly tell you how expensive even a small interest rate increase can be over the course of a 30-year mortgage. This expense takes on an even greater significance when you understand how many things can affect your interest rate. Of course, the nature of interest rates themselves should be reason enough for urgency, because they don't tend to stay in one place for very long. In addition to seizing opportunities when they become available, you should avoid doing anything that will cause you to pay a higher interest rate.  The Not-Before-You-Refinance List
Interest rates on mortgages really have two components: the going market rate for interest, and any premium or extra you need to pay to compensate the mortgage company for the risk of lending money to you.  

The assessment of risk is based on multiple factors and varies from lender to lender. Obviously, it helps to have a good credit history, but since you can't do anything about the past, here are some of examples of life decisions you should avoid making before refinancing your mortgage:  

• Changing Jobs. Unless the new job features a significant bump in income, you are best off applying for a loan while maintaining a stable employment record.
• Co-Signing a Loan. It may not be your loan, but co-signing creates a potential financial obligation and affects your credit risk. Additionally, any late payments by the primary borrower show up on YOUR credit.
• Buying a Car. Think about it this way. You already have the mortgage obligation, and assuming refinancing helps you financially, this can only benefit you when you apply for a car loan. On the other hand, getting a car loan first creates a new financial obligation, making you look riskier when you later apply for refinancing.
• Opening New Credit Card Accounts. You probably get offers all the time, but one factor in your credit score is your potential sources of debt. New financing activity almost never helps your credit score and frequently hurts it.

The Tale of the Refinance Calculator: What These Decisions Can Cost You
Of course, some decisions may be more pressing than others. If you are not sure you can hold off on taking some of the above actions before you refinance, you should at least know what they may cost you. Use a refinance calculator to get a feel for this: even a 25 basis-point addition to your interest rate adds up to a considerable amount over the course of a 30-year mortgage, and at extremes, mortgage rates for those with lower credit scores can be 2.75% greater than for borrowers with higher scores.  

Using a mortgage calculator to estimate the cost of raising your interest rate will help put some of those other decisions in perspective.  

Source:
Fannie Mae



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