Misconceptions About Refinancing
The usual refinancing rules of thumb are arguably wrong. For example, you actually don’t know whether you’ll save money if you refinance when interest rates drop more than 2%. And you actually don’t know whether or not you’re saving money just because you can pay back your refinancing costs in two years through lower payments.
Money displays a final summary page that compares the two loans. The key numbers to focus on here are at the last four rows of the schedule: the total initial costs, monthly payment, total of payments, and estimated APR. Make sure that you carefully consider the total initial costs and monthly payment values. If you can’t afford one of these figures, then you can’t afford the loan. Note, however that the APR shown here is based on the schedule length of the loan, not on how long you’ll be in the home. So it’s really better to focus not on this APR, but on the one described in this step.
Refinancing a Mortgage
If you are paying a mortgage, it is easier to wonder whether you should refinance when interest rates drop. The logic seems straightforward enough: replace inexpensive mortgage with a cheap mortgage and save money. Unfortunately, figuring out whether you’ll actually saved by refinancing a mortgage is very difficult.
Refinancing In Short
The trek to refinancing a mortgage is to make sure that you pay less for the new mortgage (taking into account both the interest charges and any refinancing costs) then you pay for your existing mortgage. To see if you pay less, you need to consider the interest rate and the refinancing costs, of course, a you’ll also need to think about how long you will be paying interest.
Fortunately, you can use the mortgage planner to perform this analysis. You use the mortgage planner as described in the preceding section, but with several minor twists. When you described your existing mortgage as the first mortgage (mortgage a), don’t worry about the loan fees and the payments you have already made. For your existing mortgage, then, there aren’t discount points, loan service fees, or closing costs. And for one your existing mortgage, the loan balance and the schedule loan length equal what is left for you to pay, not what you originally had to pay. Does all of this make sense?
Think about it for a minute and it should. When you consider refinancing a loan, you basically compare two loans: your existing loan, for which you will pay no extra discount points, no loan service fees, and no closing costs, and a new mortgage, for which you’ll pay all these extra charges.
Disclaimer: The views expressed by this author don't necessarily reflect the opinions of Lazerloan.com, it's owners, or it's affliates.
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