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. 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 - mortgage refinance spreadsheet (225)
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.
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{ 9 comments… read them below or add one }
Very good tips. If you refinance your mortgage to a lower interest rate, you may save a substantial amount on your monthly mortgage payment–which will give you more money to put toward your savings goals or reducing your other expenses. This is one of the main reasons people consider refinancing their mortgages
I do consider a variable rate mortgage to be a great tool because (at least here in Canada) the interest rate is always lower. To me, this makes sense when 1) I can still sleep well at night and 2) I can make payments as if I had a higher interst rate so that if the rates go up and I want to switch, the higher payment (either for fixed or variable) will not negatively affect me. At the same time I will be paying off my mortgage earlier.
I do recall that making two extra payments totaling $3000 on our mortgage in the first two years made a difference of years in the length of time we were making payments. It made a greater difference than paying down $10,000 about a decade later when we received an inheritance.
It is easy to overlook the long term benefits of paying a little extra on principal today. That is, IMHO another good reason to refincance as long as you compare the savings from paying more than the minimum with the cost of refinancing.p
Don’t overlook the possibility of a no point/no closing cost mortgage. If the new loan is truly 0/0, a rate reduction of even 1/8% can save you a bit of money.
To the point (1) above. Agreed. 100%. If you are 5 years into a 30 year mortgage (25 years left) and can’t afford the 20 year payment, but the bank doesn’t write a 25 yr loan, take the 30. Make the same payment you were making before, and you’ll pay it off in less that 25 years. Any online mortgage calculators will help you understand this.
@Joe
Thanks for some great ideas and suggestions! I should have mentioned that there are tons of mortgage calculators out there. Thanks for pointing us in the right direction.
@jarthurford
Thanks for sharing your opinion and preference regarding the variable rate mortgage. With interest rates being so low and the danger of inflation I think people are better of getting a fixed rate. There is a lot less risk, but as you point out the variable rate can actually result in come financial savings.
Great tips, Craig. I’m reading a pf book right now that took 5 pages to say what you said in one article – and yours was much easier to understand as well. Not a book I will be reviewing on my site.
.-= Patrick´s last blog ..You Need a Budget 3 Personal Finance Software Program =-.
@Patrick
Thanks for your kind words. I guess more words doesn’t necessarily mean better, eh?
Saving money through a mortgage refi is more than just finding the lowest interest rates. You can further cut fees and costs through the structure of your loan, avoiding PMI, and buying lower interest rates.
Those are some great tips.
It is amazing how much the term affects the savings in the long run. Just a few hundred extra a month will save you Hundreds of Thousands. Talk about a good return on investment.
That is like putting away $200 away a month for 15 years and that will be worth over $100,000.
That is $36,000 turned into $100,000. Nice!
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