| Whenever interest rates drop, as
they sometimes do when Alan Greenspan gets a little out of hand, homeowners might
have the opportunity to save money. Lower interest rates generally translate into
lower mortgage loan rates, and refinancing your mortgage at a lower rate can save
you a few bucks on every monthly payment. Deciding
whether to refinance your home comes down to a basic calculation: Will your savings
from reduced mortgage payments be greater than the up-front costs? Therein lie
the guts of the refinancing decision. Lose
the thumb, use a calculator
When it comes to making this kind of financial
calculation, everybody wants a simple "rule of thumb," and the financial
trade is usually quick to oblige. Most commonly we are told to look for a minimum
interest rate improvement of, say, two percentage points from our existing mortgage
before we get serious about refinancing. When
it comes to mortgage refinancing, however, such rules of thumb can be misleading.
The interest rate cut required to come out ahead will vary dramatically depending
on how long you plan to hold the new mortgage, how many years you've already paid
on the current mortgage, and the increasingly available opportunities for cutting
closing costs. It's hard to come
up with one rule that covers all the possible scenarios with reasonable accuracy.
However, you can take the specific numbers that match your unique situation --
how much remains on your loan, what rate you're currently paying -- and input
them into an online calculator. For
example, the Fool provides a simple "What will my refinancing costs be?"
calculator that serves nicely as a checklist of common closing costs. Use it as
a guide for surveying potential lenders. Once you get the data from lenders and
plug it into the calculator, you will be given expected closing costs -- the size
of the interest-savings hurdle you must jump to come out ahead. Your
refinancing savings
The second half of this calculation is how much you'll
save in mortgage interest payments after refinancing. This is generally a clear-cut
calculation, with one catch: To cover closing costs, you have to shell out today's
money, but the interest savings you capture in return will arrive in the future,
over time. Since the time value of money dictates that tomorrow's one dollar isn't
as valuable as today's, it makes sense to convert your future interest savings
to today's dollars for a fair comparison to closing costs, particularly if you'll
be holding the new mortgage for many years. If
that last paragraph tied you up in mental knots, never fear. Our second refinancing
calculator, "Am I better off refinancing?," takes care of the math behind
the scenes and spits out an answer for you. If you worked through the closing
costs calculator first, you'll find that a lot of the required information for
this second calculator will already be in hand. You'll just have to add information
about your existing mortgage, the loan you're trying to beat. Article
continued at http://www.fool.com/homecenter/refinance/refinance01.html 1st
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