Should You Refinance Your Home Mortgage?

Housing costs are one of the largest components of most household budgets. With interest rates changing so frequently, you should periodically determine whether refinancing at current interest rates would save you money.

To determine whether you should consider refinancing, you need to compare the costs of obtaining a new mortgage with the savings you will enjoy with a reduced interest rate. You my also want to consider refinancing to a different type of mortgage, such as switching from a 5 year balloon to a 15 year fixed rate mortgage.

Here is an example and a worksheet that will help you determine if refinancing makes sense for you. You may want to print this article and use the worksheets. Rick and Carol have a home they bought 3 years ago for \$300,000 and they have 5 years remaining on balloon mortgage of \$200,000 with an interest rate of 6.25%. Their monthly payments are \$1231.43. They intend to live in their home for several years and would like to lock in a 30-year mortgage with a 4.375% fixed rate.

Rick and Carol's Example
 New Mortgage Costs Discount points (in \$) \$ - Origination points (if any) \$ 1500 Application fee \$ 475 Credit check fee \$ - Attorney fees (yours) \$ - Attorney fees (lender's) \$ - Title search fee \$ - Title insurance fee \$ - Appraisal fee \$ - Inspections \$ - Local fees (taxes, transfers) \$ - Other fees \$ 360 Total cost of new mortgage \$ 2335
 Calculating the Savings Monthly payment on current mortgage \$1231.43 Monthly payment on new mortgage \$998.57 Difference between two mortgage payments \$232.86 Divide total fees on new mortgage by monthly savings - This is the number of months to recover your costs. 10 months

In this example, Rick and Carol would save over \$2800 annually in mortgage payments and lock in a 30 year fixed rate mortgage. Over the course of the mortgage they would pay about \$83,000 less in total interest.