Fool.com: Refinancing Can Mean Big Savings [Home Center]
http://www.fool.com/homecenter/refinance/refinance01.htm
Whenever interest rates drop, as they sometimes do when
Alan Greenspan gets a little out of hand, homeowners might have the
opportunity to save money. Lower interest rates generally translate
into lower mortgage loan rates, and refinancing your mortgage at a
lower rate can save you a few bucks on every monthly payment. Deciding whether to refinance your home comes down to a basic
calculation: Will your savings from reduced mortgage payments be
greater than the up-front costs? Therein lie the guts of the
refinancing decision. When it comes to making this kind of financial calculation,
everybody wants a simple "rule of thumb," and the financial trade is
usually quick to oblige. Most commonly we are told to look for a
minimum interest rate improvement of, say, two percentage points from
our existing mortgage before we get serious about refinancing. When it comes to mortgage refinancing, however, such rules of thumb
can be misleading. The interest rate cut required to come out ahead
will vary dramatically depending on how long you plan to hold the new
mortgage, how many years you've already paid on the current mortgage,
and the increasingly available opportunities for cutting closing costs. It's hard to come up with one rule that covers all the possible
scenarios with reasonable accuracy. However, you can take the specific
numbers that match your unique situation -- how much remains on your
loan, what rate you're currently paying -- and input them into an
online calculator. For example, the Fool provides a simple "What will my refinancing costs be?" calculator
that serves nicely as a checklist of common closing costs. Use it as a
guide for surveying potential lenders. Once you get the data from
lenders and plug it into the calculator, you will be given expected
closing costs -- the size of the interest-savings hurdle you must jump
to come out ahead. The second half of this calculation is how much you'll save in
mortgage interest payments after refinancing. This is generally a
clear-cut calculation, with one catch: To cover closing costs, you have
to shell out today's money, but the interest savings you capture in
return will arrive in the future, over time. Since the time value of
money dictates that tomorrow's one dollar isn't as valuable as today's,
it makes sense to convert your future interest savings to today's
dollars for a fair comparison to closing costs, particularly if you'll
be holding the new mortgage for many years. If that last paragraph tied you up in mental knots, never fear. Our second refinancing calculator, "Am I better off refinancing?,"
takes care of the math behind the scenes and spits out an answer for
you. If you worked through the closing costs calculator first, you'll
find that a lot of the required information for this second calculator
will already be in hand. You'll just have to add information about your
existing mortgage, the loan you're trying to beat. You may have an adjustable-rate mortgage
(ARM) and find that you're uncomfortable not knowing exactly what the
payments will be -- so you'd like to switch to a fixed-rate mortgage. Alternatively, you might want to stick with an ARM, but you may have
found one with a lower interest rate, or with appealing features such
as payment caps that are lacking in your current loan. If you choose not to refinance, you might still ask your current
lender whether it is possible to modify your current loan in order to
have it better serve your needs. Should your current mortgage include a prepayment penalty,
this could be a problem. If it is large enough, this penalty could
offset the savings you gain by refinancing in the first place. Your
current mortgage documents will indicate whether there is a penalty for
prepayment. If there's any question, ask the lender for clarification.Lose the thumb, use a calculator
Your refinancing savings
Are there any other reasons to refinance?
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