The below article, by Dennis Smith from the Motley Fool, appeared in "Daily Finance" on October 12, 2014. The article originally appeared on HSH.com.
The main draw for most refinancing homeowners is to save money on your monthly mortgage payments. According to a new study from the National Bureau of Economic Research, the median household who doesn't refinance could be losing out on approximately $11,500.
So, when considering a refinance, do not simply compare the refinance rate with your current mortgage rate to determine how much money you will save each month. Lowering your interest cost is an important goal, but you must also consider the following factors to save the most money through a mortgage refinance:
- The total cost of refinancing
- When you will begin to save money each month
- The length of the new mortgage term
- The new mortgage payment
- What to do with monthly savings
Here are some important calculations to consider to get the most savings out of your refinance:
When will I begin to save money?
To calculate when your finance will actually begin to save you money, take the total cost of your refinance and divide it by your monthly savings after you refinance. This will tell you how many months it will take to pay off the refinance. You will need to live in the property longer than the number of months it takes to payoff to actually realize any savings. Use HSH.com's refinance calculator to learn exactly how long it will take for you to begin saving money.
Can I shorten my refinance term?
Another important refinance calculation is to determine whether you will take a longer or shorter-term loan on your refinance. If you are refinancing, say your current 30-year loan into a new 30-year loan, determine how many years you can shave off your mortgage term by making your "old" payment on your newly refinance mortgage.
Let's say your "old" mortgage has 25 years left on it, and refinancing at current rates lowers your monthly payment by $400 each month. If you could apply your old cost to your new monthly payment (i.e., prepay your mortgage an extra $400 per month,), how soon until the mortgage is paid off? More than likely, by paying that extra $400 each month, you could pay off your mortgage in fewer than 25 years - - possibly saving you tens of thousands of dollars.
A refinance calculator can help you determine how fast you will pay off your refinanced mortgage.
Can I invest my refinancing savings?
Mortgage refinancing can save you tens of thousands of dollars. If you're not strapped for cash, be sure to have a plan in place for the money you save from refinancing. Will you invest in your child's education? Do you plan to prepay your mortgage so you can pay off your loan early? Are you going to add your monthly savings into a 401(K) or another retirement savings account?
Low mortgage rates are not going to last forever. If mortgage rates rise substantially, you could miss out on your opportunity to save thousands on your mortgage. Be sure to run some financial calculations to see just how much you can save, and have a plan in place for your savings to get the most out of your mortgage refinance.