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How to Refinance a Mortgage

Mortgage refinancing

There are costs associated if you want to refinance a mortgage, and, unless you plan on remaining in your home for a few years, it won’t make sense to refinance a mortgage. You have to recover the costs involved through interest savings, and that takes time.

Starting at square one – take a look at what you want to accomplish through mortgage refinancing. There’s more to it besides just getting a new mortgage with a lower interest rate.

No one enjoys paying any interest. If you had all the money you could imagine you would be able to buy another home, and pay for it by writing a check. I’m sure we would all like to one day pay off our mortgages and own our homes “free and clear.”

Suppose you have been paying on your present 30-year mortgage for the past eight years so you have 22 more years to go until “free and clear” arrives. If you refinance with a replacement mortgage (at a lower rate, of course) for another 30 years your monthly payments go down – but “free and clear” is now 30 years into the future again.

Another thing to look at is the question of how much money to refinance. If you have sufficient equity in your home you can take out some cash by financing a larger sum (again, at a lower interest rate).

This ought to be done very cautiously. We understand that mortgage rates are cheaper than auto loans, for example. It’s also true that home mortgage interest is tax deductible, and car loan interest can’t be deducted. Still, it is unwise to put yourself in a position where you may be paying for the car you are driving for the next 30 years.

“Points” are generally the largest component of the cost of refinancing a mortgage. Each point is 1 percent of the mortgage amount. In addition, other refinancing expenses like appraisal fees, credit reports, title insurance, etc., can easily exceed $1,000 in total.

Points paid in connection with a refinancing can be written off for tax purposes, but not all at once – it must be spread over the life of the loan. Let’s look at some numbers relating to a hypothetical $100,000 mortgage.

A 30-year mortgage at 10 percent interest works out to a monthly principal and interest payment of about $878. Over the life of that loan you repay the $100,000 plus interest of $215,926. If you could refinance into an 8.5 percent mortgage your monthly payments would drop to $769 per month on the same $100,000 balance. You would save $109 a month on your monthly payment.

If you could get the 8.5 percent with only one point you would repay the refinancing costs in just a couple of years. Rates are going to have to drop another 1 1/2 points or so before we will see 30-year loans at 8.5 percent with only one point, however.

If you can handle a higher monthly payment, consider a 15-year mortgage. Fifteen-year rates are always less than on 30-year loans. Most importantly, your interest cost over the life of a 15-year loan at 8.5 percent is $77,253 compared to $176,809 for a 30-year loan – again we are talking about a $100,000 mortgage amount.

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