Using a Refinance Calculator for Budget-Based Refinancing

Mortgage payments are often a household's largest single expense. It is natural to budget around this expense, making other monthly expenditures fit into what's left over after the mortgage payment is made. In tight economic times though, this can become increasingly difficult, and may start to squeeze out some essential purchases. An alternative to fitting your budget around your mortgage is to refinance so your mortgage better fits your budget.

Use a Refinance Calculator to Budget

The key to this is using a refinance calculator. Starting with a target mortgage payment--a monthly payment that readily fits your household budget--you can use a little trial and error on a refinance calculator to adjust interest rates and mortgage terms and determine what kind of mortgage would give you the payments you'd like to see.

Target a Payment on a Refinance Calculator

Refinance calculators let you input various mortgage terms and see how these translate into monthly mortgage payments. For example, for a given size loan, you can try various interest rates and repayment periods (e.g., 15-year, 30-year, etc.) to see what monthly payment would result.

As an alternative approach, you can start with a desired monthly payment in mind, based on your budget. Then try to fit the loan into that target monthly payment, first by lengthening the repayment period as much as possible, and then by lowering the interest rate. In other words, start out with a payment assumption and work backward from there.

Monitoring Your Target Interest Rates

Of course, finding the ideal interest rate isn't as easy as punching in a number on a refinance calculator. You may not be able to find the interest rate that yields your target mortgage payment, but at least you will have learned what that interest rate is. Knowing this will give you a target for refinancing.

Several things can help make this target attainable:
  • Interest rates rise and fall in the marketplace over time.
  • Comparison shopping can help you get the best available interest rate.
  • If your credit score, income, or equity has improved, you may find yourself eligible for a better interest rate--for example, your first loan was a stated income mortgage but now you can qualify for a traditional loan.
  • Your timeframe may shorten, making a low-rate ARM or hybrid ARM a feasible choice.

What to Do When a 30-Year Mortgage Becomes a 15-Year Mortgage

If you can't find your target interest rate, you may eventually be able to lower your payment to your monthly target by refinancing to a longer mortgage. You may have started out with a 30-year mortgage, but let's say you now have 15 years remaining. This is now effectively a 15-year mortgage, with a lower principal amount (because of the principal you've repaid so far). A refinance calculator can quickly show you whether refinancing to a 30-year mortgage will help you meet your target monthly payment.

It's important to note that lengthening a mortgage means paying more interest over the long run, but it may be the right budgetary tactic to help you make ends meet in the near term.

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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