Refinancing and Mortgage Calculators

With the variety of loan programs available in the market combined with the wild swings in interest rate levels it can be prudent to evaluate the potential to save money through refinancing your existing loan.  Refinancing options include loans with no points, no points and no loan closing costs, points to pay the interest rate down, cash out refinances, refinancing to a fixed rate loan or even refinancing to an adjustable rate mortgage.  Taking the time to evaluate whether a refinance of an existing mortgage is a financial benefit or costly error will be time well spent. 

The refinance and break even analysis mortgage calculator can help make the process of understanding the costs and benefits of refinancing a home loan much easier.
However, often overlooked elements in the analysis of refinancing an existing mortgage are the changes in cash flow, an increase or decrease in equity and the total expenses or interest charges throughout the life of the loan.

When a borrower refinances and the new mortgage loan is just enough to pay off the existing mortgage balance owed, this is referred to as a rate and term refinance.  Using a mortgage calculator to perform a breakeven analysis on a rate and term refinance is fairly straight forward.   The mortgage calculator will compare the existing mortgage with the new intererest rate, term and closing costs of a refinance.  The end result will be an analysis of the monthly mortgage payment savings as well as the costs and a measurement of the time it takes to cover the costs with those monthly savings. 

If the borrower has enough home equity built up in their existing home, they could potentially borrow an additional amount above the current principal balance that is owed.  This transaction is referred to as a cash out refinance.  A mortgage calculator can readily evaluate the new interest rate, mortgage loan amount and the annual costs for obtaining a cash out refinance.  The evaluation will help determine if the additional funds provided by the cash out refinance are worth the costs of the loan.

A borrower might also want to refinance in order to switch an adjustable rate mortgage, which has a rate that may increase or decrease increase overtime, to a fixed rate mortgage which provides the predictability of unchanging mortgage payment for the life of the loan.  However, a borrower considering a new refinance has to measure the fact that even though the monthly payment might now be fixed, either higher or lower depending on the rate of the new loan, the loan period may increase along with the total interest payments.  Using a mortgage refinance calculator will help determine if the payment change on the new loan, the term of this loan and total interest charges of the new loan make the refinance choice a financially prudent decision.

Refinancing an existing mortgage can be used to consolidate debt or consolidate a first and second mortgage into one loan.  These types of refinances offer short term payment savings and convenience of one monthly loan payment.  If the interest rate on either the existing first or second mortgage is greater than the current market for mortgage interest rates, the savings may be substantial.  Over the long term, consolidating short term debt into a long term loan may be expensive.  Using a mortgage calculator to compute the monthly savings of the cash out refinance and it will be easy to see the monthly savings.   The mortgage calculator can then be employed to see how quickly the borrower can reduce the term by prepaying the loan with some of the extra savings from the refinance.  This is a great way to make sure the savings are used to reduce the total mortgage debt rapidly.

A final refinance consideration is for direct monthly mortgage payment relief.  During times of stressed budgets it is a viable option to refinance an existing mortgage for a longer term in order to reduce the payment, a lower rate if it is possible or refinancing into a adjustable rate mortgage to exploit the benefit of a low start rate found with these mortgage products.  These options may very well reduce the mortgage payment but are not without risks or costs.  The mortgage calculator is a convenient starting point to evaluate the payment and costs changes when refinancing into an adjustable rate mortgage, a longer term, or a lower rate.  Regardless of the situation, a mortgage calculator can assist in making a well informed mortgage choices for refinance transactions.

This entry was posted on Thursday, December 11th, 2008 at 9:09 am and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.