Should I Refinance?

Perhaps you've heard that mortgage rates are near historic lows or you've worked hard on improving your credit score. Maybe you've even got a tempting quote for a new mortgage. How do you know whether refinancing makes sound financial sense? Are you asking the right questions? Let's look at some simple cases that will help or use our mortgage refinance calculator to evaluate your own situation.

First, let's look at a simple case where you are in a fixed loan and believe you may qualify to refinance into another fixed rate loan with a lower interest rate and a shorter term and no cash out or cash to close. Here are the details:

 Current Loan  New Loan 
Loan Amount$200,000$197,000
Interest Rate8%6.75%
Term (Years)3025
Current Principal Balance$192,438.04N.A.
Minimum Principal &
Interest Payment
Total Interest To Be Paid
over Remaining Life Of Loan

The new loan certainly looks attractive. You would save over $100 per month on your principal and interest payment and you would pay about $54,0000 less in total interest over the remaining life of the loan, but should you refinance into the new loan? It depends. One question we haven't asked is: how long you plan to stay in your home? Let's say your in a job where you'll be expected to relocate in 3 years.

Making minimum payments with your current loan your principal balance would be $184,954.75 after 3 more years. With the new loan the balance would be $186,936.49 so you would end up with about $2,000 less in equity after selling your new home. So keeping the new loan would be better right? Well not necessarily since if you made extra payments of $106.43 on the new loan so the total payment equaled what you would have with the old loan, the balance on the new loan would be $182,702.69 after 3 years.