When Refinancing Saves Money | Mortgage

by JohnDashwood

A recession is not all bad and for those who have kept their finances clean and always paid bills on time are presented with a one of a kind economic opportunity. Financially strong investors and some middle class people with some extra money are able to make speculative investments in properties that have been foreclosed. The question is what benefits could there be for those with no extra money to spend or who don't have the nerve to buy cheap homes they don't really need.

One great reason to refinance is to save money. Income is not just a product of investments, but it can also be accomplished through savings and that is at a phenomenal level nowadays. Many still don't understand, though, how refinancing can save.

Refinancing creates savings for you in two ways - lower monthly mortgage payments and lower interest rates. Lower monthly payments is a given. All refinanced mortgages, regardless of prevailing market rates give debtors lower monthly payment terms. The real secret is playing with interest rates.

There are two factors which will determine what interest rate you will receive on your first mortgage from your bank or lender. Those are your credit rating and the present prevailing market interest rates. Both of those factors can fluctuate and if the interest rates have dropped since you first purchased a home, then it is a good time to take refinancing into consideration and the decision should be made before the rates increase again. Also, if your credit score has greatly improved since you first got a mortgage then that too will save you money if you refinance.

It is also noteworthy to mention that, in addition to these market conditions, the decision boils down to matching the cost to refinance with projected savings. Typically, closing costs are 2-3% of your principal amount, paid upfront. Although if you are shopping for mortgages and refinance mortgages these days, you'll very likely encounter no-cost refinance offers.

Speaking of no-cost offers, beware of such offers. Freebies are a thing of the past. Companies who cover closing costs do not eliminate this cost from your account; they collect it in alternative ways, often in higher-than-market interest rates. If you have a short-term horizon, however, you can enjoy upfront cost savings without the burden of high mortgage rates for a long period of time.

Going back to the decision at hand, when does refinance actually save you money? Do your math to find out! An easy way to do this is to add up the remaining amortizations on your current mortgage (of course, include all charges applicable to date), and compare this with the sum of the total payments you expect to make under a refinanced mortgage, plus closing costs. Both options are cash outlays; pick the option that gives you a smaller figure.

An alternative is to go with the savings approach. In order to determine if the idea of refinancing is a good one, then calculate the interest payments you would have expected to pay on the outstanding balance of your mortgage and then calculate the total anticipated interest to be paid on the refinancing option. Just find the difference between the two and compare that amount with the amount of closing costs that will have to be paid for the refinancing. If the interest saved is more than the total cost of refinancing then you should go and do it since you would really save money. If refinancing will cost you more than just stay with the mortgage you have.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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