Basic refinancing

You have been through the process before. Finding and signing a mortgage is stressful, nerve-racking and yet rewarding.

Well, a couple of years have probably gone by since you signed your original mortgage and you want to have a lower monthly payment. So, what do you do? Refinance.

Just like the mortgage process, refinancing can be very confusing and it requires a lot of research which results in knowledge. The more knowledgeable you are, the more confident you will be in choosing the right program and terms to refinance with.

Mortgage.fidelitylabs.com posted the article, “Deciding to Refinance: The Basics,” which will help you determine which refinance, if any, option is suitable for your needs.

“Because of the complexities involved in refinancing, it can be difficult to shop for a mortgage refinance, or even to know whether refinancing is a good option. You can't really get the big picture without taking into account the interest rate, the closing costs, the terms of the old loan as well as the new, and the break-even point. Fortunately, a few fairly straightforward calculations can simplify things greatly.”

The most important thing you have to determine is the “break even” point. This point is when profits equal expenses. “How many hot dogs do you have to sell to cover the cost of your hot dog cart?”

This question directly relates to refinancing. The expenses are your closing costs and the savings on your monthly payments are the profits. Eventually, the savings on your monthly payment will equal what you paid in closing costs, and then you will truly begin profiting.

“Let's say that your closing costs equal two thousand ‘hot dogs’ and you are decreasing your monthly payment by one hundred ‘hot dogs’ each month. That means that in twenty months, you'll reach your break-even point and henceforth one hundred hot dogs a month will go into your pocket (no mustard please). If the break-even period is longer than you expect to be in the house, don't do it. It's that simple.”

Well, maybe not that simple. There are a few other things to consider. One is that if you refinance for a longer term, your monthly payment will be significantly lowered, but your overall costs will increase.

“If you are refinancing a thirty year mortgage with twenty five years left for a new thirty year mortgage, of course your monthly payment will be lower. However, when you take into account the total interest you pay over the lifetime of the mortgage, you may actually come out behind. This all depends on your new interest rate and how much you paid for closing. Make sure you look at the total interest paid over the life of the loan as well as the change in your monthly payment.”

On the other hand, you may choose to make higher monthly payments in order to shorten the term of your loan, thus saving money by shortening interest payments.

A big thing to think about that is often overlooked is closing costs.

“It's common to roll these costs into the new loan, so that they ‘disappear,’ but you're still paying them. Similarly, some lenders offer "no cost" refinance. What really happens with a no-cost refinance is that you pay a slightly higher interest rate in exchange for the lender covering your costs. The upshot is that you walk in, sign some papers and get a lower monthly payment. If you are planning to stay in the home for a shorter period of time, a no-cost refinance, or one in which the closing costs are included with the loan might make sense.”

Which ever direction you decide to go in is your choice. Do not let any lender push you into something you are not comfortable with. But do consider all of your options.

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