Interest rates on mortgage programs have continued to drop leaving countless consumers who may have taken advantage of recent refinances asking themselves if perhaps another refinance is in their best interest. Since modern refinance programs, even those federal programs such as the Home Affordable Refinance Program (HARP), contain fees or closing costs to execute, it is worthwhile to look objectively at what you have, what you can accomplish by restructuring your deal and also, where you as a homeowner are going in the future – before taking the plunge.
These 6 steps will show you how to compare the cost of savings on a lower rate while factoring in the increased balance of rolling in closing costs.
Run through the pre-qualification process with a local bank or a credit union. This will help you understand whether or not you are likely to qualify for a refinance program in your situation. You will be provided with an estimate of closing costs for doing the loan - which is essential to figuring out how the refinance will benefit you. Be careful to make sure that the input is quality. If, for instance, you will be rolling the costs into the principal balance so you are not expected to bring a check to cover closing costs, make sure that it is reflected with the projected balance of the new loan.
Calculate the remaining amortization schedule of the mortgage you have. For instance, if you are 3 years through a 30 year mortgage exactly, calculate the current balance and interest rate by the 27 years remaining on the loan. Here is an amortization calculator you can use. If you don’t use this one, it is best to find one that breaks down monthly payments.
Calculate out the payment schedule of the new mortgage, using the new rate and the new and increased balance (assuming you are rolling in the closing costs), and difference in monthly PMI (private mortgage insurance) premiums if applicable. HOWEVER, calculate over the remaining term you have left on your current mortgage (using the example above, calculate over 27 years). Plenty of times, your monthly savings is explained as the difference in what you are paying now versus what you will be paying. In doing that it also assumes that you are content with starting payments over on a new 30 year loan. Write down the amount you are actually “saving” per month or the difference between what the principal and interest payment is now compared to what it would be if refinanced using the same amount of months left on the current loan.
Run through the same calculation on the new mortgage numbers except over the proposed term (ie: 30 years) to show what will happen in the future if you do fall back on the 30 year payment. Also, notate the amount of money the payment is set to decrease from the current mortgage payment.
Start comparing the amortization charts to see when the principal balance under each option would be less than what you currently have. Note that if you are thinking of restarting your term to save money on monthly payments, how much that will lead to an inceased balance at any particular stage. To further solidify your decision, you may also take into account the total amount you will have “saved” on single payments up to that point. Then subtract it from the projected balance determine if what you are saving on payments justifies the increase to your balance.
Once you know the amount of time it would take to more or less break even (where you would owe less than what you’d owe just keeping your mortgage), look at how likely it is you will still be in the house or not need to have restructured the loan further. As a HUD Housing Counselor, the average mortgage I see is around 4.1 years old. However, the breakeven point as a result of a refinance oftentimes takes more than 10 years of payments to achieve.
Have some questions about refinancing? Give LSS Financial Counseling a call at 800.777.7419. We have Certified Housing Counselors here to answer your questions. Or, if you’re looking for options for your unsecured debts, such as a Debt Management Plan, call us or start ONLINE FINANCIAL COUNSELING now. There is no better time than the present to take action and improve your financial situation.
Author Tim Fischer with LSS is a Certified Credit Counselor and specializes in Foreclosure Prevention Counseling.