How to Calculate the Feasibility of Refinancing

Refinancing your mortgage is a process that involves taking out a new loan to pay off the existing one for the purpose of getting a lower interest rate, lower payment or getting cash out. When refinancing, timing is very important. Before engaging in a mortgage refinance, it is important to calculate the feasibility of doing so and determining if you are actually going to save money by going through the process. If not, you may want to simply keep your existing mortgage.

Instructions

1

Shop around for new mortgages. When shopping, look at many different options such as online lenders, local banks and mortgage brokers. When you shop around, get an estimate of closing costs from lenders. Lenders are supposed to give you a good faith estimate of closing costs within three days of applying for a loan. Also find out approximately what your payment would be with the new loan interest rate.

2

Determine how much monthly savings you would realize by refinancing. For example, if your existing mortgage payment is $1,000 per month and the new mortgage payment is $800 per month, this is a savings of $200 per month.

3

Divide the monthly savings by the total for the closing costs. For instance, if the closing costs were $3,000 and you saved $200 per month, it would take 15 months to realize enough savings to make up the difference for the closing costs.

4

Evaluate whether refinancing makes sense in your situation. If the amount of time that it would take you to pay off the closing costs is longer than you plan on staying in the house, it does not make sense to refinance. If you will be in the house longer than that, it does make sense to refinance.

5

Consider other factors that may play a role in your decision. Not everyone refinances just to save money on the mortgage payment. For example, if you need to get cash out of your home's equity, these factors become irrelevant. Determine if your existing mortgage has a prepayment penalty. If so, this could also impact your decision.

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