Refinancing always sounds like a good deal when you can reduce your interest rates and monthly payment son your mortgage but does it always make sense to refinance your mortgage? Not always, which is why you should do some calculations before hand to make sure it will really benefit you in the short term and long term.

The Short Term
The short term benefit of refinancing is realizing a monthly savings on your mortgage payments. Reducing your interest rate enough to realize a substantial monthly savings can be very attractive to many potential refinance customers but this may be short sighted.

The Long Term
The long term takes into consideration much more than the monthly savings you may realize from refinancing your mortgage. The long term picture should include:

• Change to your remaining term
• Change to your mortgage balance
• Cost of the refinance
• The time frame you estimate you will continue to own the property

The Calculations
Below you will find a calculator to estimate your savings from refinancing your mortgage. Enter your numbers and find out what your savings might be. After you are done with the calculations we will use some of the figures to analyze your results.

The Results
If the “Net Savings” was negative then refinancing will not be in your best interest. If your “Net Savings” was positive then refinancing may make sense and we should move on to another quick calculation.

With a positive “Net Savings” we should now calculate your break even point or the point in time where the cost to refinance is made up by your monthly savings. From your results in the calculator take your “Closing Costs” and divide that by your the monthly savings in the “Difference” column on the “Mortgage Payment” column. Here might be an example:
Closing Costs = $5,000
Difference = $133
Break Even = $5,000 / $133 = 37.59 or 38 months

This will help you in making the decision on whether refinancing will make sense based on the time period you expect to continue to own the home. In the example of above, if you planned to sell within about three years (or 36 months) then you will not recoup the cost of refinancing within the time period. If, however, you were planning to move in five years (or 60 months) then you would recoup your costs because after month 38 you will realize savings each month with your reduced payments.

We want to hear from you…
Did you refinance recently? Looking to refinance? What do your calculations show?

Beware of online mortgage calculators because they may not give you the full story.  Most buyers these days are researching mortgage information online before they ever speak to a mortgage lender to become educated and ready to handle this huge purchase.  Many of these buyers are searching for mortgage calculators online to help them to determine how much they can afford and what the payment might be at particular purchase prices or interest rates.

Most mortgage calculators online do not show the full payment you would be required to pay and the payment that mortgage lenders use to qualify you.  A typical mortgage calculator will only show the Principal and Interest portion of the payment and does not include the taxes, homeowners insurance, mortgage insurance or HOA, otherwise known as Principal, Interest, Taxes and Insurance (PITI).

Mortgage calculators are a great way to help you in calculating the payment, but you should add in a few other items, to make sure you fully understand the payment your lender will be using in their calculations and the payment you will be making each month.

• Principal and Interest – use calculators you find online such as the one on 1st Priority Home Loans
  • Other calculators exist to help determine how soon you could pay off your mortgage if you pay additional principal, rent vs. buy calculators.  Some sites even include mortgage qualifying calculators.
• Taxes – this includes your property taxes and can be found through public records by searching for county assessors public records search in the county you are looking to buy.  Take the yearly tax amount and divide by 12 to determine the monthly amount you should add to P&I for the tax portion of your PITI payment.
• Insurance – shop around for homeowners insurance.  A good place I recommend you start is with your current auto insurance policy company.  They can provide a quote and maybe even offer a discount due to multiple policies.
• Mortgage Insurance – if you plan to put less than 20% down, you may have mortgage insurance as a part of your payment, too.  Check with your mortgage lender to discuss what this amount may be for you.
• HOA – depending on the property you purchase, you may have an HOA payment to make.  Although this payment will not be included in your payment to the mortgage company, it is a payment that is calculated into your qualifications by your mortgage lender.

Use mortgage calculators, but understand the payment they provide and realize that there are other items that will be included in your monthly mortgage payment.

Lending a hand,

Scott Wynn