Refinancing your mortgage could be a great way to save some money and even accelerate your house mortgage repayment. Unfortunately, people commonly do a refinance in order extend their term and thereby lower their payments. Any time your extend your term you are agreeing to pay more for the mortgage in the long term.
Refinancing your mortgage could be a great financial move as long as you follow some important guidelines.
Guidelines to Consider When Refinancing Your Mortgage
- Don’t extend the length of the loan. Remember, your goal in this process is to get out of debt. The fastest way for that to happen is for you to take as short of a term as possible. That just how a mortgage works. If you are going to use the refinance as an excuse to extend your mortgage then skip the refinance.
- Consider reducing the length of the loan if it fits into your budget percentage categories – 25-35% of your take home pay. In fact, if you are reducing your rate and you can handle a small increase in monthly payments you will save a ton of money over the life of the loan. For example, for a $150,000 loan at 6% over 30 years you will have a monthly payment of $900.00 and you will pay a total of $324,000. If you could reduce your rate to 5.5% and get a 15 year loan you would pay $220,590.00 over the life of the loan. Your payments would be $1225.50 per month.
- Contact multiple banks. Since banks are always competing, don’t just visit your local branch. Shop around and be sure that you are getting at least the national average. Visit www.bankrate.com to get the national loan average.
- Negotiate. If you feel better about one company but their rate is not as competitive, don’t be afraid to let them know the situation. Use one simple negotiating tip – ask if they can do any better.
- Anticipate your plans. If you plan to or might move within two years the refinance might not make sense. Using the forms below you will be able to find out how valuable a refinance will be if you plan to move soon.
- Don’t add anything more to the mortgage. Sometimes people use a refinance as an excuse to borrow more money. Once again, this would be a step in the wrong direction. Don’t borrow more money. In fact, paying off your mortgage early can be a great idea.
- Stick with a fixed rate loan. Fixed rates are predictable. When it comes to your place of residence you need the security of knowing you can afford mortgage interest rates. Any significant increases will be too costly.
When Does A Mortgage Refinance Make Sense?
- When you it doesn’t force you to assume any extra risk (assuming you use the guidelines above).
- When it saves you money (see the free refinance mortgage calculator and worksheet below).
Free Refinance Mortgage Calculator and Worksheet
Download your free mortgage refinance spreadsheet now - [download id="17"]
How to Use the Free Downloadable Mortgage Refinance Spreadsheet
You can download, edit, distribute and change the form (please leave the attribution link).
The form can be easily customized based on loan length, interest rate, and mortgage amount.
- Download the worksheet.
- In section “B2” (highlighted yellow) enter your actual mortgage rate.
- Go to “D20”(highlighted in blue) and enter your current monthly payment (from the chart – just find your loan length and your current interest rate).
- Go to “D21”(highlighted in red) and enter your new monthly payment according to the available interest rates you are finding.
- Go to “D24” (highlighted in green) and enter the closings costs for your refinance.
- If “D25” (highlighted in purple) is a positive number then you should consider refinancing. Obviously, the larger the number the more important it is that you refinance.
Photo by mescon.