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MORTGAGE REFINANCE

When Should You Refinance?

Written By:
February 15, 2011 at 12:54 AM

The best way to determine if you should refinance or not is to use mortgage calculator and current interest rates. These online tools calculate amortization and mortgage costs and they should be able to show you what you will pay on your refinancing. This way you should be able to see if you should refinance or not.

A homeowner should only go through the hassle of refinancing if it will actually reduce their mortgage costs. Fortunately, refinancing can save many homeowners money but they can only see this if they use the tools provided.

How to determine if and when refinancing makes sense

The first question a family needs to ask when considering refinance is: “how long do we plan to stay in this home?” If a family is planning to sell their home within five years, refinancing is usually not a good idea. The savings from refinancing usually take several years to accumulate so the family wouldn’t see them by the time they sold the property.

The next question a homeowner needs to ask: “is will refinancing actually reduce my mortgage costs?” The way to determine this is to calculate the savings from the new or reduced interest rate and the cost of refinancing. The cost of refinancing is the fees and other charges on the new mortgage. If the cost of refinancing exceeds the savings from the new interest rate, it does not make sense to refinance.

An example of this would be Fred & Wilma, they had a $200,000 thirty year mortgage on their home and were paying a 5% interest rate. This meant they had a monthly payment of $1,073.64. After doing a little research, Fred decided to see if refinancing to a 4% interest rate would save him any money.

This would be a good deal for Fred because it would reduce his monthly payment to $954.83 if he and Wilma stayed with a 30 year mortgage. If they switched to a 20 year mortgage it would not be a good deal because the new payment would be $1,211.96 or over $100 more.

Fred would have been able to figure this out had he used the mortgage calculators provided. It is always a good idea to take the mortgage calculators and play around with them a lot before making any decision about refinance.

As you can see many factors including the terms of the mortgage and the costs can affect the cost of refinancing. The interest rate is only one factor in refinancing but it is a very important one.

The Myth of the 1% Rule

Perhaps the biggest myth going around about mortgage refinancing these days is the 1 or 2% rule. Many people believe that reducing mortgage interest by 1% or 2% through refinancing simply does not pay. The truth is that reducing your mortgage interest rate through a properly done refinancing can save a homeowner quite a bit of money.

In the example shown above, Fred and Wilma cut their mortgage interest by 1% and they were able to save $118.81 a month. That comes to $1,425.72 a year or $42,771.60 over the thirty year life of the mortgage. This means that the average American family can save quite a bit of money through a properly structured 1% mortgage refinancing.

Most families would undoubtedly welcome an extra $118.81 a month or $1,425.72 a year. The savings of $42,771.60 would be enough to send a child to college or pay for a very comfortable retirement nest egg. Refinancing could be the equivalent of a pay raise at a time when many of us are barely getting by.

It should be noted that Fred and Wilma were only able to get this savings with a 30 year mortgage. They would have ended up paying $100 more a month had they gone with a 20 year mortgage. Therefore it is always a good idea to use the calculator to determine the costs of all models of refinancing before going to one.

The Lesson of the 1%

The big lesson of the 1% rule for homeowners is an obvious one: “don’t believe the popular wisdom about refinancing.” Instead do your homework, do the research and math yourself when you are considering refinancing.

The math proves that the folk wisdom behind the 1% rule simply is not true. It is entirely possible for the average family to save quite a bit of money by reducing their mortgage interest by as little as 1% if they do it properly.

Mortgage refinance calculator, mortgage affordability calculator and current interest rates table let anybody see what the true costs of a mortgage can be. This means that nobody should be relying on such folk wisdom for mortgage advice. Instead, a person should rely on mortgage calculators and current market interest rates.

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