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Mortgage Rate Refinance Calculators Factor In Closing Costs

You have two competing mortgage refinance rate quotes. One offers a slightly lower interest rate, but higher closing costs. How do you compare this to the other offer, which has a higher interest rate but lower mortgage closing costs? It may seem like apples and oranges, but our mortgage refinance calculator can help you make sense of the comparison.

Five Tips

If you're like most people, you don't make mortgage decisions every day, so it is easy for us to become intimidated by the jargon & math involved. Fortunately, like all of our mortgage rate calculators, our refinance calculator is very user-friendly.  You can easily make meaningful comparisons between mortgage rate quotes with different closing costs - just follow these five steps:

    1. Don't eyeball it. A difference in mortgage closing fees will be expressed in dollars, while a difference in mortgage interest rates will be expressed in percentage terms--and probably amount to a fraction of a percent. Psychologically, the difference in dollars will tend to look larger, but this can be misleading. That's why you should do a little more analysis rather than just eyeballing the difference between two quotes.

    1. Use a mortgage refinance calculator to turn interest rates into dollars. A refinance calculator does this by projecting out the total interest costs of the loans over the 15-year or 30-year life of your mortgage. By turning interest rates into dollars, you are closer to being able to make a fair comparison with closing costs, but remember--dollars you save now are worth more than dollars you save ten or twenty years down the line. You need to do more to put those more distant interest rate savings into perspective.

    1. See what the impact is if you finance the closing costs. One way to account for the impact of time on when you realize the savings is to calculate the different costs as if you were financing the closing costs (i.e., adding them to the initial principal of your mortgage). Comparing the total principal and interest this way will give a truer comparison of whether you are better off with a lower mortgage interest rates and a higher closing cost, or vice versa.

    1. Mortgage closing costs are more of an impact on 15-year mortgages. As a rule of thumb, closing cost differentials will be more important on 15-year mortgages than on 30-year mortgages, since interest rate differentials have less impact on shorter term home loans.

  1. Don't forget to include your existing mortgage in the comparison. When comparing two refinancing quotes, don't forget to throw your existing mortgage into the equation as well. Treat that as a mortgage quote at your current interest rate - with no closing costs. This will show you whether your interest rate savings will overcome the impact of having to pay a fresh set of closing costs by refinancing your mortgage.

 

Conclusion

A few minutes with a mortgage refinance calculator can save you hundreds, or even thousands, of dollars. Think of that as an hourly rate in return for your time, and you'll realize the effort is well worth it.



Posted By :
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.


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