Should I Refinance? Factors to Consider and Other Opitions

Deciding whether to refinance is not as simple as determining if you can or cannot get a lower mortgage rate. I will be evaluating three different scenarios of factors you should consider before you decide to refinance. For more information on refinancing, consider clicking on the relative links provided by Google on the right hand side where you can find refinancing lenders, mortgage calculators and other tools.

How Much Will You Save a Month

The first thing you want to consider is how much money you will save on your monthly payment.

Example one
Mortgage	Interest rate	Number of years	Monthly payment
$160,000	7%	30	$1,064
Refinanced Mortgage
$160,000	6%	30	$959

For a 1% decrease in interest rate you will save $105 a month, over a 360 month mortgage this savings would amount to $37,800

Now let’s assume we pay the minimum in closing cost fees, according to lending tree that amount would be $1,350 + 2.5% of the mortgage = $5,350. No problem right? We will just add that to the principle. After amortizing this amount of 30 years it will cost you $11,520! In this scenario it would still be worth refinancing your loan.

Example two
Mortgage	Interest rate	Number of years	Monthly payment
$160,000	5.75%	30	$934
Refinanced Mortgage
$160,000	5.5%	30	$908

In this second example we are now saving $26 a month or $9,360 over the period of the mortgage.

Our refinancing costs are still $5,350 and we will save $4,010. If we add the closing cost to the principle over the 30 years our new monthly payment becomes $939; which is higher than the original 5.75% mortgage. This may still be an option if you can pay the entire closing costs in cash but before we do that lets identify another option

My third example is an option to often over looked by the average individual and that is to invest the amount of closing costs instead of using them to refinance. This can be a profitable scenario if you can achieve a higher return then the interest rate savings.

Example Three
Initial investment	Investment return	Number of years	Future value
$5,350	10%	30	$106,130
If your rate would have dropped from 7% to 6% you would have saved $37,800

In the 3^rd example you would have made $106,130 vs. saving $37,800 your benefit = $68,330

In conclusion the three factors that you should consider before refinancing is your monthly savings, as well as 30 year savings, your savings after closing costs are paid and how that changes if they are added to the principle and amortized over 30 years, and lastly how much more you can profit from investing your would be closing costs elsewhere.