With mortgages once again at historic lows, I’ve once again considered refinancing our mortgage. A few months ago we weren’t sure how long we’d be living in our current home and so we put off refinancing, despite rates being as low as 4.75% APR. Fortune has smiled on us and rates have once again come close to those lows and I’m taking another look.
Mortgage refinancing, much like buying a home, can sometimes be a scary process because it involves what usually is the largest asset you have. That’s the case for us, our home is our more valuable physical financial asset by far, and so any decision involve something of that magnitude can be a little scary.
Fortunately, mortgages aren’t quite that complicated and there is a wealth of resources available to help you compare different offers.
Analyzing Mortgage Refinance Offers
When you get mortgage refinance quotes, there are a lot of information to process. Here’s what I always try to find out:
- APR – This is the interest rate on your mortgage.
- Term – This is the the length of your mortgage (30 years, 15 years, etc.).
- Points – To get the listed rate, you may need to pay “points.” A point is 1% of your mortgage amount. You may be able to deduct mortgage points if you meet some requirements, outlined in Topic 504 at the IRS .
- Fees – The fees the lender will charge to process the refinancing.
You can get sample rates, by providing only your ZIP, by going to Bankrate or you play with live ammunition and actually request quotes through Lending Tree (if you don’t want a deluge of calls, Quicken Loans had the top listing for my zip code).
Comparing Mortgage Refinance Offers
Now that you have a couple offers, is the lowest APR the best offer? Maybe, maybe not.
Whether you refinance depends on more than your interest rate because the fees and points involved in a refinance, combined with your future plans, dictates what’s financial smart. For example, if you plan on moving next year, you won’t refinance because you don’t have enough time to recoup savings from monthly payments.
Should you refinance? First, fire up this useful refinance breakeven calculator from DinkyTown.net. Enter in your existing mortgage information and the offer you think is your best refinance offer, then click calculate.
Here’s what the screen may look like, with some sample information (click to enlarge):
If you use the calculator, they’ll explain the difference in the four bars.
Click on View Report and scroll
down to Refinancing Summary because this is where the real fun happens. The report will tell you how much in actual total interest you’ll pay over the life of the loan. In my example above, I have $120,167 total interest remaining on the last 16 years. If I were to refinance and increase the number of years on the mortgage back to 30, I would see a $600 drop in monthly payments but I’d slide backwards on the amortization table; I’d pay an additional $73,000 in mortgage interest.
The Decision: The decision now becomes, do you want a monthly lower payment or do you want to pay the least in total interest? If the answer is a lower monthly payment, the correct choice is to get the new loan. This isn’t unexpected because you’ve taken your existing loan balance and stretched it back to 30 years, naturally the monthly payments will be lower.
What if I want to lower the total interest?
Converting to a Different Term
In our comparisons above, we looked at how the monthly payment changed and how much you saved on a month to month basis. If I want to lower the total interest, rather than just the monthly payment, perhaps I should go to a 15 year mortgage.
According to Bankrate. I could get a 15-year mortgage at 4.525% APR. I’ll spare you the screenshot but the four breakeven bars are 8 months, 7 months, 9 months, and 9 months. Again, it would take less than a year to recoup the closing costs of $1500.
What about my payments? I click on the View Report button and I see that my monthly payment has actually gone down by $80 and I would, over the course of the 15 year loan, pay $36,500 less in interest! That wounds like a win win situation to me.
Note: 4.525% APR, right now, seems like an insanely good interest rate. I don’t know that I’d be able to get that interest rate if I were to get live quotes.
All of the breakeven points were under a year and since we don’t have any plans to move within the next year, I’m thinking I’m going to try this exercise with live ammunition. I’ve had good success with Lending Tree in the past, it was a resource I leaned on whenever I bought the house for the first time and I might go back. The one caveat I have with them is that you’re dealing with a broker, so expect a ton of phone calls.
Are you thinking about refinancing? Or have you already refi’d?