Should I Refinance My Mortgage?
Should you should refinance? The answer depends on your personal
and financial goals. This case study will show you how to assess
refinancing options objectively, in order to make the choice
that is right for you.
Refinancing Considerations
You use exactly the same approach to evaluate a mortgage for refinancing
as you use to evaluate a new mortgage. Specifically, you do the following.
- Set mortgage goals. To make the right refinancing
decision, you need to first state your mortgage goals. Your
mortgage goals are the objective criteria by which
different refinancing options will be judged.
For a review of this topic, see the lesson on
setting mortgage goals.
- Gather mortgage information. First, you need info about
your current mortgage (unpaid principal, mortgage rate, remaining
loan duration, etc.). Next, you need similar info about the new
mortgage that you are considering. For a review of this topic,
see the lesson on
shopping for mortgage information.
- Assess mortgage performance. The key output of
a refinancing analysis is an objective assessment of
how well the new mortgage option satisfies each mortgage goal,
compared to the existing mortgage.
Given this assessment, it is easy to choose the mortgage that
performs best.
Once you have set mortgage goals and gathered mortgage information,
this site's
mortgage calculator
can help you assess pros and cons of refinancing.
The following case study illustrates the process.
How to Compute Savings From Mortgage Refinancing
Joe has an existing fixed-rate mortgage. The unpaid balance is $160,000,
the interest rate is 7.75 percent, and there are 20 years remaining
on the loan.
Joe can refinance to get a new fixed-rate mortgage with a lower interest
rate. The details of both loans are described below.
| Loan term |
20 years |
20 years |
| Loan amount |
$160,000 |
$160,000 |
| Interest rate |
7.75 percent |
7.00 percent |
| Down payment |
$0 |
$0 |
| Points |
0 |
1 |
| Other costs and fees |
$0 |
$1,000 |
In order to refinance, the lender requires Joe to pay 1 discount point plus
$1,000 in closing costs.
Suppose Joe's mortgage goal is to minimize total mortgage
costs. To find out which strategy more effectively achieves his goal,
Joe uses this site's
mortgage calculator.
His first step is to describe the analysis. Here's how.
- Choose "Evaluate refinancing plan" from the Main Goal dropdown box
of the calculator.
- In the "Options" section, check the box for
"Show amortization schedule".
- Choose "Fixed-Rate Mortgage" as the mortgage type for both loans.
The calculator then prompts Joe for the data it needs. He enters
data from the above description into the calculator.
The calculator settings and data entries are shown below.
Describe the Analysis
Main goal:
Describe the Loan
Mortgage type:
Describe the Costs Paid at Closing
Other costs and fees ($):
After Joe clicks the
Calculate button, the calculator produces two useful results - a
refinancing analysis (reproduced in the table below) and an amortization
schedule.
| Loan duration |
20 years |
20 years |
| Total interest expense |
$155,243.45 |
$137,711.46 |
| Points |
$0 |
$1,600 |
| Other loan costs |
$0 |
$1,000 |
| Total mortgage cost |
$315,243.45 |
$300,311.46 |
| Savings |
. . . |
$14,931.99 |
The refinancing analysis shows that Joe can save almost $15,000 by refinancing, over
the 20-year life of the mortgage. However, the amortization schedule reveals
that savings from refinancing do not
begin until the 27th payment period. Until then, the current loan
is the less expensive option. Therefore, if Joe plans on staying in
his home for more than 27 months, he can save money by refinancing.
Otherwise, he is better off with his current loan.