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?

Last Edited: June 3, 2010 @ 2:57 pmThe content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Check if your state is a non-recourse state. Re-financing will generally turn your purchase money loan into a non-purchase money loan, and if you default, the lender may go after you for any deficiency.

    Most people don’t plan on defaulting on their loans, but it is something to consider.

    Consult your local attorney, as each state is different.

  2. PT,

    Have you ran the calcs yet to see how long you have to stay in your home before you cross over? I know you said Bankrate, but you also may want to check out DinkyTown (dumbest name but best website ever!)

    I can’t refi because I plan on moving within 2 years, and the drop in % won’t make it worth it.

  3. @Dan – Solid advice. I didn’t know that.
    @Evan – 18 months is my break even point for closing costs. However, they are giving me the option of bumping up the interest rate and providing a rebate for the closing costs. No current cash outlay, and still a decent rate (5.5%). So, whether I stay 2 months or 20 years, I’m still saving money. The way I see it, the choice is now between the no cash outlay 5.5 and the 5.25 rate with 2500 in closing. I’m leaning towards the former.

  4. Pt,

    I am literally dealing with the exact same situation on a smaller scale for my Car. I have 2 options:

    http://www.myjourneytomillions.com/articles/experiences-auto-refinancing/

    Let me know what you think!

  5. I considered it under the government’s program to refinance underwater loans (b/c out in here in CA practically everyone is underwater) but the interest rate on it isn’t low enough yet. My current interest is 6.5 and they are offering 5.75 right now, not enough to make it worth it yet. But my lender just said the program was extended another year so maybe the rates will continue to come down, though I don’t hold my breath. I can’t believe .75% doesn’t make a big enough difference but he’s telling us it’d be less than $100/month in savings so it’d take a while to make it worth the closing costs and appraisal. We shall see…

    Tell Mrs. PT I said hi! 🙂

  6. @KC – Well, I hope it comes down a bit more for you, and real estate values go up! 🙂

  7. @CharlieM – My hopes are that we see a bounce, especially for our friends on the coasts. I think it will depend on location. Cities like Detroit are going to struggle for a while.

    A while back I saw a prediction that real estate values won’t move up until late 2010. But I think that may be too soon to expect anything. The jobs just haven’t come back. When jobs return to normal levels, then wait six months. People will start buying again.

  8. CharlieM says:

    What do you for see as far as real estate values for 2010?

  9. Good luck on your refinancing quest PT! What duration and rates are you looking at/finding now?

  10. Paul in Silver Spring, MD says:

    I owe $125,000 on a 30-yr. loan at 5.75%. My monthly payment is $904, but I add $100 to principal each month. I’m trying to determine whether I should just stick to that (at 8yrs of the 30 years) or refi for 15 yrs. I plan to retire next year, but my income will be about 90% of what it is currently. Looking at different calculators I get slightly different results, and just am not sure which is the best route to save money and also pay off the loan.

  11. @Paul – My opinion is that you have a good loan now. And since you are retiring next year, I would wait till then to make any decisions on moving to a 15. By then you’ll have a better idea of your ability to afford the higher monthly payment.

  12. Paul in Silver Spring, MD says:

    Thanks…that’s kinda what I thought now. And I’m going to make even larger payments over the next 12 months to knock it down even more.