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Do the Math for Mortgage Refinancing

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The Associated Press recently reported spikes in refinance applications as the lowest mortgage rates in decades have many homeowners considering refinancing their mortgages. When considering refinancing, do not just compare the refinance rate with your current mortgage rate. Lowering interest is an important factor, but one must also consider the cost of refinancing, the new mortgage payment, and the term of the new mortgage. Here are some calculations you can do to see if refinancing makes sense for you.

Calculate refinance cost versus monthly savings. When looking at a mortgage refinance offer, use this simple calculation: take the total cost of refinancing and divide it by your monthly savings after you refinance. This will tell you how many months it will take to pay for the refinance. Will you own the property longer than this number? Use this refinance calculator to determine when your refinance savings repays the closing costs.

Calculate shorter term on your mortgage. Another way to determine if refinancing is right for you is to calculate how many years you will save by making your current payment on your newly refinanced mortgage. Let's say your current mortgage has 25 years left on it, and refinancing at current rates lowers your monthly payment by $400 each month. If you apply your current monthly payment to the newly refinanced mortgage (i.e., prepay an extra $400 per month), how long until the mortgage is paid off? More than likely, in fewer than 25 years--possibly saving you tens of thousands of dollars. An amortization calculator can help you calculate how fast you will pay off your refinanced mortgage using your current mortgage payment.

Determine how you will invest the monthly savings. Mortgage refinancing can save you ten of thousands of dollars. Have a plan for the money you save before you refinance. Will you invest in the children's tax-free education funds? Pay off your mortgage early? Fund your retirement accounts? A financial calculator can show you the future value of your monthly savings from refinancing.

Is refinancing your mortgage with current interest rates right for you? Do the math to see, and have a plan for your savings to get the most out of your mortgage refinance.

About the Author

Dennis C. Smith is co-owner and broker of record for Stratis Financial in Southern California. With over twenty years experience in the mortgage industry he has helped thousands of families refinance their mortgages saving millions of dollars in interest payments.

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