Should You Refinance Your Mortgage?

I’m currently in the process of reviewing our home loan for a possible refinance. I know a ton of you are out there saying, “should I refinance my mortgage?” Mortgage rates are much lower than when we purchased our home, and we have the opportunity to refinance through our current lender without paying closing costs.

As I’m making my decision, I’m paying attention to several factors. All should be taken into consideration when looking to refinance your home mortgage.

Factors to Consider When Thinking of Refinancing Your Home Mortgage

Here are the factors along with some questions you should be asking about each one.

Interest Rates – What is your current interest rate? What would it be if you refinanced? Is there a big enough difference between the two? Are rate’s expected to go up in the future? A rate change of just 1% can make a huge difference in the amount of your payment, and more importantly, the amount of interest you’ll pay for the life of the loan. View a current list of mortgage interest rates for your area and type of loan.

Loan Type – Are you moving from an adjustable rate mortgage (ARM) to a fixed rate loan? Are you considering moving the loan terms from 30 years to 20 or 15?

Closing Costs – How much will it cost you to refinance? Do you have this amount available in your short term savings? How long will it take you to recoup these costs? Will you be in the home that long? Some closing costs can be negotiated. Sometimes you can include the closing costs in the new loan balance, or pay for them by using a higher interest rate.

Your Credit Rating – Has your credit rating recently gone up? You might qualify for a better refinance interest rate now. Do you expect your credit rating to go down, or did you lose your job?

Your Personal Time Line – How long do you plan to be in the home and keep the mortgage? Will you be there long enough to recoup the closing cost? Are you looking to rent your home in the future? Will the lower payment allow you to rent it more easily?

Your Budget - Do you need to refinance to make more room in your budget? Refinancing can sometimes lower your payment and allow you to set more money aside for savings. Refinancing can also increase your payment if you want to get rid of your loan faster and pay less in interest.

Principle You’ve Paid – Consider how much you’ve paid into the loan already. If you’ve paid 20% of your home’s value, you may be eligible for a drop of your private mortgage insurance (PMI). If your current lender won’t drop it, consider a refinance to get rid of it.

What You’ll Need to Complete a Mortgage Refinance Calculator

There are a ton of free refinance calculator available on the web. Bankrate.com has a nice one. Here are the items you’ll need to complete the refinance calculation:

Current Loan Amount – Here you’ll enter the amount you borrowed to buy your home. As an example, say you bought a $200k home with 20% down, your original loan amount would be $160K.

Current Interest rate (%) – Simply enter the current interest rate on your home mortgage.

Term (in years) – Enter the amount of years your original mortgage was for (i.e. 30 yrs vs 15 yrs.)

Current mortgage balance – This is how much you currently own on your home mortgage. Find your latest bill and look for the balance.

Refinance Interest rate (%) – Here you’ll put the interest rate you’ve been quoted on the new loan.

Term (in years) - What is your new term? 30 years? 15?

Pre-payment penalty (%) - Will you owe a prepayment penalty for paying off your old loan amount a bit early? If you don’t know, call your current lender and find out. This needs to be factored into your decision.

Closing costs on new mortgage - Closing costs often include a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge, and other costs assessed at settlement. The closing costs typically run around 2% to 6% of the new mortgage total.

Number of points on new loan - This would be any extra money you are paying to achieve a better interest rate.

For an extensive list of the purchase and refinance interest rates in your area, check out my brand new mortgage rates page.

I haven’t quite made a decision on my own mortgage refinance yet. Have you refinanced lately? Do you have some other factors I should consider?