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Should You Refinance Your Home Loan?

Current mortgage rates are low and it seems like it might be a good time to refinance your home loan. You’ve even begun to gather quotes from several local mortgage lenders advertising competitive mortgage rates. But does it make sense to do a mortgage refinance at this time?

Use a Loan Calculator

It is important to determine the amount of time it’s going to take to recoup any money you put out to refinance. Use the “Is it time to refi?” loan calculator to compare several mortgage quotes. The following example walks you through the steps of using the loan calculator.

Existing Home Mortgage

First, the loan calculator asks for information about your existing mortgage.

  • What is the original term of your home mortgage? For this example let’s use 30 years.
  • What is the original amount of your mortgage loan? Our example uses $250,000.
  • What is the current balance of your home loan?  ($175,000)
  • How long have you had the mortgage? (8 years)
  • What is your current interest rate? (7%)

New Home Loan 

Next, the loan calculator needs information about the new mortgage.

  • What is the amount of the new loan? ($175,000)
  • What is the new mortgage term? (15 years)
  • What is the interest rate on the new loan? (5%)
  • How much are the estimated closing costs? (2%)
  • How long do you plan to remain in the home after doing a mortgage refinance? (10 years)

How Much Would You Save?

When you run the numbers in the loan calculator, you get a report detailing your potential savings. Using the numbers in this example you would go from having a monthly mortgage payment of $1,663 to paying $1,384. Over the 10-year period that you plan to remain in the home you would save $33,524 due to the decreased monthly mortgage payment.

Reducing Mortgage Loan Principal

The loan calculator also gives an analysis of the reduction of loan principal. In this scenario if you refinanced and stayed in the home for 10 years the principal would be reduced by $101,667. However, if you did not refinance your mortgage, the principal would be reduced by $111,194 over the 10-year period.

Total Savings

The last part of the report shows that the estimated cost of refinancing is $3,500, which is based on the 2% closing costs. It also shows that the total amout that would be saved by refinancing would be $20,497.

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