How to See If You Need Mortgage Refinancing

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By Two Hands Gatlin
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See If You Need Mortgage Refinancing

Mortgage refinancing is not always the best option, even if rates are lower than when you first purchased your house. For one thing, there will be another batch of closing costs, which will eat into any savings you get from a lower mortgage rate.

Difficulty: Moderate

Instructions

Things You'll Need:

internet access to use the online mortgage refinancing calculator

Step 1

A rule of thumb is that interest rates need to be 2% lower than what you are currently paying, for mortgage refinancing to make sense.
Step 2

Mortgage refinancing is simply getting a second loan on your house, and paying off the old one. That means there will be closing costs, just like the first mortgage. Closing costs can be as high as $2,500 plus 4% of the refinancing amount. It will take some time to re-coup that money in the form of lower monthly payments. If you plan on selling your house within 3 years, you’re likely to lose money on the deal.
Step 3

If you have an adjustable rate mortgage (ARM), you should probably refinance to a fixed-rate loan, as long as the rates are low. Even if it isn’t the 2% reduction mentioned in step 1. But it will depend on the terms of your ARM, and where your rates will go if you don’t refinance.
Step 4

Remember that mortgage refinancing starts the 30-year payment clock back to month #1. If you plan to stay in the house, look into 20-year and 15-year payment options. It will cost more per month, but save you tens of thousands of dollars over the duration of the loan. The lower rates might make it affordable on a monthly basis. (When I ran the numbers on my $120,000 house, the 15-year loan would save me $79,000 compared to the 30-year. That’s enough for a nice used Ferrari!)
Step 5

The mortgage refinancing calculator, linked in the resources section, will show you the potential savings based on your principal and rates, before and after refinancing. For example, it showed me that I could save a pile of money by refinancing to a 15-year loan, but it doesn’t make sense for me to refinance to another 30-year loan.