How to Use a Mortgage Refinancing Calculator

Using a mortgage refinancing calculator can be an excellent tool to help you make a sound decision on whether to refinance your current mortgage. Mortgage interest rates are at historical lows and it can be very tempting to want to run out and immediately refinance to save money each month. However, it doesn't always make sense to refinance as the monthly savings may not make up for associated closing costs or remaining payments on an existing loan. Here are some steps that you can use to help you use a mortgage refinancing calculator to make educated decisions.

Difficulty: Moderate

Instructions

Things You'll Need:

• Computer
• Internet Access
• Home Mortgage

1. Determine your current monthly mortgage payment including principal and interest that you are paying on your home. You first need to understand your current payments (interest and principal) before you use a mortgage refinancing calculator. A baseline needs to be established so you can make an educated decision on what the refinance calculations reflect.

2. Collect the following pieces of data to plug into a mortgage refinancing calculator - remaining loan balance plus any additional closing cost fees, refinance interest rate, number of years to refinance. These 3 data attributes can be used to calculate a new mortgage payment that can be compared against your existing payment. You can either create a formula in excel to calculate a refinance monthly mortgage payment or use one of many free online calculators.

3. Take the new monthly mortgage amount and subtract your current monthly mortgage amount to calculate the difference. Take this amount and multiply it by 12 to calculate the yearly savings you would receive from refinancing. For example, if the monthly difference equals $100, then your yearly savings is $1,200.

4. Use the estimated closing costs (quoted by your lender) and divide this amount by your monthly savings amount calculated in the prior step. Part of the benefits of using a mortgage refinancing calculator is to determine how many months or years it will take to break even on your closing costs of the new loan. For example, if closing costs are $3,000 and you are saving $100 per month - your break even point will be 30 months or 2.5 years. This number is critical to helping guide you to make an educated decision on refinancing.

5. Multiply your new monthly payment from the mortgage refinancing calculator and multiply it by the number of months of the new loan. For example, if the new payment is $1,000 for a 30 year loan, the total payments will come to $360,000. Compare this number with the total amount you would pay on your current mortgage. If the current loan has 20 years remaining at $1,100 - the remaining costs would equal - $264,000. In this case, it would not make any sense to refinance a new 30 year mortgage just to save $100 per month!

Tips & Warnings

• If you plan to remain in your home for longer than the break even point, then refinancing may be the way to go.
• Refinancing may not always make financial sense - even if you will get lower payments. If you plan to sell your home in a year or two after refinancing, then it isn't worth the associated costs.

Resources

• A Guide To Living Cheap