Refinance calculator: back to basics

October 06th, 2010

With mortgage rates continuing to remain at historic lows, many homeowners may not be aware of how much they can save with a mortgage refinance. Here is a basic primer on using the refinance calculator to determine how much you can save with today’s rates.

Simple preparation

As with any of the free on-line mortgage calculators it is best to be prepared before using the refinance calculator. Have available your current mortgage statement that shows your current mortgage balance, current mortgage interest rate and your current mortgage payment. Do not include your taxes and insurance if you have those payments impounded, or escrowed, by your lender and part of your monthly mortgage payment, do however include the mortgage insurance if you have it on your mortgage.

Payment reduction, cash-out, or both?

Have an idea of what you wish to accomplish with your mortgage refinance. Is the purpose of your refinance to lower your monthly payment and provide some cash-flow relief every month? This is known as a rate and term refinance and most lenders require that you decrease your mortgage payment by at least 5 percent to be eligible; the refinance calculator can help determine if you meet this criterion.

Do you want to pull some cash out and pay down some other debt or do some home remodeling? If so be prepared to have a higher interest rate than a rate and term refinance depending on your mortgage amount and the loan to value of your new mortgage (loan to value is the percentage of your home’s value that is covered with the mortgage). Many homeowners are finding they can keep their mortgage payment the same and because of the low mortgage rates available pull cash out of their property. Using the home affordability calculator can help you determine if this option is available to you.

With rates as low as they are, depending on your current mortgage rate and how much equity you have in your home, you may be able to accomplish both: lower your monthly payment and pull some cash out of your property.

Using the refinance calculator

With your current mortgage information at hand, using the refinance calculator is quite simple. Follow the steps entering the information on your existing mortgage. Then enter the desired interest rate and costs of your refinance mortgage and whether you wish to pull cash out as part of the transaction. Be sure to indicate if the closing costs will be rolled into your new loan balance, paid by you at closing with a check or paid by your lender — i.e. a zero-cost refinance.

Click on the “calculate” button and you will see a chart comparing your current mortgage and proposed refinance mortgage. The comparison shows your current mortgage payment and new payment and the total interest paid on both mortgages; on the bottom of the chart you will see your total savings, if any.

Refinance calculators are great tools for you to use in financial planning. Combined with other available mortgage calculators you can determine if it makes sense to pull cash out of your home, continue to make the same monthly mortgage payment but dramatically reduce the term of your mortgage, or leverage the low mortgage rates currently available for reduced monthly mortgage payments. Using the online mortgage calculators is simple and the payoff can be tremendous.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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