How to Compare Mortgage Refinance Offers Using "Cost To Refinance Analysis" To Determine Whether I Should Refinance My Home Mortgage

"Should I refinance my mortgage?" That is one question that I kept asking myself a few months ago. I understood, however, that mortgage refinance would only make sense for my family if the cost to refinance (also known as "closing costs"), allowed us to save money soon enough as we intend to purchase a new home in approximately four years. Afterall, if it took almost that amount of time to "break even", then it would not make financial sense to refinance my home mortgage loan. You should use the following steps to perform a "break-even" analysis to compare mortgage finance offers.

Instructions

1. First, determine how much your current mortgage home loan is costing you. Make a list of all of your expenses associated with your home mortgage. Do you currently pay private mortgage insurance ("PMI")? If you home has increased in value so that your loan-to-value ration ("LTV") is better than 80/20, PMI is an unnecessary expense. Mortgage refinance might make financial sense if for no other reason than to save this cost.

2. Next, determine the amount of your closing costs to determine the cost to refinance your home mortgage loan. A good indication of the true "cost to refinance" is expressed in a yearly percentage known as the "annual percentage rate" ("APR"), and includes interest costs and other refinancing fees that your lender will charge during the duration of the mortgage loan.

3. Compare mortgage rates. There are many good places on the internet that you can find a free mortgage calculator to assist you in comparing mortgage rates. Obviously, just a small different in the mortgage interest rates will translate into substantial sums of money over the life of a mortgage loan.

4. Divide your closing costs by the amount of your monthly savings you will get on the new mortgage loan. This answer tells you how many months it will take you to break even with your mortgage refinance. For example, if you can lower you mortgage payments by $250 per month, and the closing costs total $5,000, it will take you twenty months to break even. If you intend to remain in your house longer than twenty months, mortgage refinance is a good way to free up some money.

Tips & Warnings

• Request a Good Faith Estimate ("GFE") for your mortgage refinance loan.

• Make sure consider whether your currently mortgage has a pre-payment penalty and, if so, whether that term has expired. Relatedly, it is important that you determine whether your new mortgage loan will have a pre-payment penalty. If it does, you must include that penalty in the "cost to refinance" analysis.