What Are the Advantages of Refinancing Your Mortgage

Many homeowners are scrambling to refinance their mortgage and with good reason. Interest rates are at an all time low and people can realize a substantial savings once they refinance. In order to take advantage of a mortgage refinance you must do your homework. Shop around and speak to several mortgage lenders and banks to find out what the fees will be. You could incur fees such as closing costs, title insurance, title search, application fee, appraisal fee, credit reports, inspection fees, points and other fees just to name a few.

The total cost of the fees could be as much as $3,000 to $6,000, or more, depending on your loan amount and the financial institution. Closing costs will usually range between 3 and 6 percent of your principal loan amount. With that in mind you may want to make sure you are going to stay in your home long enough to recover your fees. Let's look at an example. For example if you have a principal loan in the amount of $150,000, for 30 years, with an interest rate of 8 percent, and monthly payments of $1100.65 you can calculate your savings after refinancing. If you can refinance and get an interest rate of 4.5 percent for the same term your monthly payments will be $760.03. Assume you have total costs of $6,000.

After your loan is refinanced you will save $340.62 on a monthly basis, ($1100.65 - $760.03). Take the difference between your old and new payment and divide it into your total costs, ($6,000/$340.62). In order to recover your costs of $6,000 you should remain in your home, after refinancing, for almost 18 months, (17.61). To leave your home after one year may not be prudent but it all depends on your goals and what you are trying to accomplish.

People refinance for other reasons such as using the equity to consolidate credit card debt, tuition expenses, home improvements, vacations and other investments. Refinancing can take place if someone wants to shorten or lengthen their mortgage term, which will also change the amount of your monthly payment and the finance charges you pay.

A refinance of your mortgage can save you a significant amount of finance charges over the life of your loan. If you take your old payment and multiply it times the loan term you get $396,234, ($1100.65 x 360). This figure represents the total amount of your loan you will have to repay, principal and interest, if you keep the loan outstanding for the entire 30 years. To find out how much you will pay in finance charges subtract your principal loan amount of $150,000 from the total amount of the loan, ($396,234 - $150,000 = $246,234). Finance charges will be $246,234 over the 30 year term.

With a new payment of $760.03 your finance charges will be considerably less over a 30 year term. Take $760.03 times 360, ($760.03 x 360), and your total loan amount will be $273,610.80. After subtracting the principal loan amount of $150,000 from the total amount of the loan, your finance charges will be $123,610.80. Compare the difference in finance charges, before the refinance, and after the refinance, ($246,234 - $123,610.80). You save $122,623.20 over a 30 year term. The amount you save can be even more if you add an additional amount, every month, such as $50 or $100 to your mortgage payment. A mortgage calculator can help you determine how much you can save using different scenarios.

http://www.lendingtree.com/stmrc/refiarticle5.asp?bp=v2 Costs of Refinancing. Lending Tree

http://www.bankrate.com/finance/mortgages/when-to-refinance-your-mortgage-1.aspx Author: Don Taylor, "When to refinance your Mortgage".

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