 |
Refinancing
Can Mean Big Savings |
Whenever interest rates drop,
as they sometimes do when Alan Greenspan gets a little out
of hand, homeowners might have the opportunity to save money.
Lower interest rates generally translate into lower mortgage
loan rates, and refinancing your mortgage at a lower rate
can save you a few bucks on every monthly payment.
Deciding whether to refinance your home comes down to a basic
calculation: Will your savings from reduced mortgage payments
be greater than the up-front costs? Therein lie the guts of
the refinancing decision.
Lose the thumb, use a
calculator
When it comes to making this kind of financial calculation,
everybody wants a simple "rule of thumb," and the
financial trade is usually quick to oblige. Most commonly
we are told to look for a minimum interest rate improvement
of, say, two percentage points from our existing mortgage
before we get serious about refinancing.
When it comes to mortgage refinancing, however, such rules
of thumb can be misleading. The interest rate cut required
to come out ahead will vary dramatically depending on how
long you plan to hold the new mortgage, how many years you've
already paid on the current mortgage, and the increasingly
available opportunities for cutting closing costs.
It's hard to come up with one rule that covers all the possible
scenarios with reasonable accuracy. However, you can take
the specific numbers that match your unique situation -- how
much remains on your loan, what rate you're currently paying
-- and input them into an online calculator.
For example, the Fool provides a simple "What will my
refinancing costs be?" calculator that serves nicely
as a checklist of common closing costs. Use it as a guide
for surveying potential lenders. Once you get the data from
lenders and plug it into the calculator, you will be given
expected closing costs -- the size of the interest-savings
hurdle you must jump to come out ahead.
Your refinancing savings
The second half of this calculation is how much you'll save
in mortgage interest payments after refinancing. This is generally
a clear-cut calculation, with one catch: To cover closing
costs, you have to shell out today's money, but the interest
savings you capture in return will arrive in the future, over
time. Since the time value of money dictates that tomorrow's
one dollar isn't as valuable as today's, it makes sense to
convert your future interest savings to today's dollars for
a fair comparison to closing costs, particularly if you'll
be holding the new mortgage for many years.
If that last paragraph tied you up in mental knots, never
fear. Our second refinancing calculator, "Am I better
off refinancing?," takes care of the math behind the
scenes and spits out an answer for you. If you worked through
the closing costs calculator first, you'll find that a lot
of the required information for this second calculator will
already be in hand. You'll just have to add information about
your existing mortgage, the loan you're trying to beat.
Are there any other reasons
to refinance?
You may have an adjustable-rate mortgage (ARM) and find that
you're uncomfortable not knowing exactly what the payments
will be -- so you'd like to switch to a fixed-rate mortgage.
Alternatively, you might want to stick with an ARM, but you
may have found one with a lower interest rate, or with appealing
features such as payment caps that are lacking in your current
loan.
If you choose not to refinance, you might still ask your current
lender whether it is possible to modify your current loan
in order to have it better serve your needs.
One caution
Should your current mortgage include a prepayment penalty,
this could be a problem. If it is large enough, this penalty
could offset the savings you gain by refinancing in the first
place. Your current mortgage documents will indicate whether
there is a penalty for prepayment. If there's any question,
ask the lender for clarification. |
|
|
|
