by: Derek Gardner
To save money, you must live in your house longer than the "break-even period" ? the period over which the interest savings just cover the refinance expenses. The larger the spread between the new interest rate and the rate on your existing loan, the shorter the break-even period. The more it cost to get the new loan, the longer the break-even period.
But be careful. The break-even period is not the cost of the new loan divided by the decrease in the monthly mortgage expense. This broadly used rule of thumb is a misapplication of the principle that when explaining something to the buyer one should "keep it simple." Simple is fine, except for when it is wrong.
The rule of thumb does not permit for the difference in how rapidly you pay off the new loan as opposed to the old one.
Let us say that in 1996 you took out an 11% 30-year fixed rate loan, which now has a $100,000 balance and 21 years to run. You refinance into a 7% 15-year loan at a fee of $3,750.
Monthly expense on the old loan = $1019
Monthly expense on the new loan = $899
Reduction in monthly expense = $120
$3750 divided by $120 = 31 months
The rule of thumb say that you break-even in 31 months. But, because of the shorter term and lower rate on the new loan, in 31 months you would owe $7,041 less than you would have owed on the old loan. So, the rule of thumb in this case critically overstate the break-even period. Taking account of difference in the loan balance, you would actually be in advance of the game in 12 months, as showed below:
Savings in monthly expense: $120 for 12 months = $1440
Plus lower loan balance in month 12: $2620
Equals total saving from refinance: $4060
Less refinance cost: $3750
Equals net gain: $310
Next think about the case where an 11% loan taken out in 1996 was for 15 years, and now has only 6 years to run, while you plan to refinance into a 30-year loan. With the lasting term shorter on the old loan and longer on the new one, the difference in monthly expense rises to $1238. Using the rule of thumb the $3750 cost would be recovered in only 3 months. But this fail to consider the slower loan repayment on the new loan. Taking account of the slower repayment, you do not really come out in advance until 14 months out.
The rule of thumb (dividing the upfront cost by the decrease in mortgage expenses) approximates the true break-even period only if the term on your new loan is close to the unexpired term on your old loan. In other circumstances it can lead you critically off course.
The rules of thumb also ignore the detail that if you had not refinanced you could have earned interest on the money you pay upfront to refinance; and if you do refinance and the expense is reduced, you can now take home interest on the savings.
About The Author
Derek Gardner Huge amount of Home Loan quality Information on this site - Go visit! http://www.homeloan.infostairs.com
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Ask the Expert: When do I Refinance My Home?
Ask the Expert: When do I Refinance My Home?
by: Jay Popejoy
Home refinancing is a wonderful financial tool for homeowners to use for debt management to investments. If the home refinance is used correctly, wisely, and at the right time, the benefits from the refinance can improve the financial picture of the homeowner. There is no cookie cutter approach to refinancing. Each individual or family has their own unique set of circumstances. Here are some common questions homeowners often ask when they are considering refinancing.
What is the most critical question to ask myself when refinancing a home?
Is refinancing going to put you in a better position financially? Will refinancing reduce your monthly expenses, meet a critical family requirement, or improve your investment portfolio? If the answer is yes, it is probably a good time to refinance.
What is a cost benefit analysis?
This is a detailed account of the actual cost of...
Ask the Expert: When do I Refinance My Home?
Refinance > Ask the Expert: When do I Refinance My Home?
Why Credit Cards are a Bad Idea
Why Credit Cards are a Bad Idea
by: Randy G. Hutchings
When you shop on the Internet or over the phone, it?s the only good way to do it ? what else are you going to do, post a cheque? Like anything convenient, though, credit cards have a flip side ? in fact, they have lots.
Can You Keep Track?
When you walk into that shop and hand over the card, the money is taken from the card, and the card goes back into your wallet. You still have all the things you started with ? there?s no less money in your purse or wallet to remind you of what you?ve spent.
Everyone has a tendency to underestimate what they spend, and smaller amounts can add up quickly on a credit card without you even noticing. It?s like taking the way phone bills work and applying it to everything you buy ? and that can?t be a good idea.
Money For Nothing.
Using credit cards is a great way of losing a percentage of your income to a credit card company in...
Why Credit Cards are a Bad Idea
Refinance > Why Credit Cards are a Bad Idea
Cash Out Refinancing
Cash Out Refinancing
by: Jennifer Hershey
Refinancing is to pay off your existing mortgage with another one at a lower rate.
A cash out refinance is refinancing your existing mortgage and borrowing some of your equity in a lump sum to use for other purposes. Such as home improvement, college tuition, family vacation, etc.
Other reasons people use a cash out refinance is to use the equity in their home to invest in real estate, or start their own business.
Cash out refinances are very good tools when used for the right reasons. It is not wise to do cash out refinancing if you are going to receive a higher interest rate than what you already have on your current mortgage.
If you have a really good rate on your current mortgage, it would be wise to leave it alone.
However, if you are looking to tap into the equity you have acquired in your home without touching your current mortgage, you may want to consider a Home Equity...
Cash Out Refinancing
Refinance > Cash Out Refinancing
Cash Out Refinance - Things To Know About Refinancing Your Mortgage To Get Cash Out
Cash Out Refinance - Things To Know About Refinancing Your Mortgage To Get Cash Out
by: Carrie Reeder
A cash-out mortgage allows you to refinance your mortgage and pull out part of your equity. Before deciding how much to cash to use, be aware of the impact of PMI and equity amounts. However, you may find the benefits of refinancing outweigh the costs.
Cash-Out Mortgage Basics
With a cash-out mortgage, you can refinance for lower rates or to just get part of your equity out. Once the refinancing process is completed, you will end up with a check. You can decide to take up to 90% of your home?s equity in some cases. However, cashing-out a large percent of your home?s value will impact your refinancing rate and might require you to carry private mortgage insurance (PMI).
The Cost Of PMI
Just like with a regular mortgage, you will be required to carry PMI if you take out more than 80% of the home?s value. PMI protects the mortgage...
Cash Out Refinance - Things To Know About Refinancing Your Mortgage To Get Cash Out
Refinance > Cash Out Refinance - Things To Know About Refinancing Your Mortgage To Get Cash Out
Is Home Mortgage Refinancing Really Worth It?
Is Home Mortgage Refinancing Really Worth It?
by: Steve Shannon
Is it really worth it? Excellent question... since the refinancing process can take upwards of 2-3 months to complete, plus the expenses and hassles of refinancing may outweigh the benefits.
Not everyone should refinance just because rates are lower. The general rule of thumb is to consider refinancing if rates are at least 2% lower than your current rate. This is considered a safe margin.
Also, consider these things...
Are you planning to sell the house at any time? If so, how far into the future? It may not be beneficial to refinance now. Many people who are "in the know" say that it takes 3 years to fully realize the savings from refinancing; considering in all of the costs of refinancing.
Will you have to pay a penalty for closing the current loan? This may be substantial enough to change your mind about refinancing.
Do you have an Adjustable Rate Mortgage?...
Is Home Mortgage Refinancing Really Worth It?
Refinance > Is Home Mortgage Refinancing Really Worth It?
How Creating Curb Appeal Will Help You Selling Your Home
How Creating Curb Appeal Will Help You Selling Your Home
by: Susan Wong
You may not know and realize how important of curb appeal to your home. It is a common sense that if you have an attractive and clean home on the outside, this will make someone want to see the inside. This strategy is very useful when you are attempting to sell you home; great curb appeal is just as important as having a home show beautifully on the inside. If the outside is not clean this...
Refinance
Refinance > How Creating Curb Appeal Will Help You Selling Your Home
Ford Your Way with Quality Ford Auto Parts
Ford Your Way with Quality Ford Auto Parts
by: Chuck Smith
The Ford Motor Company has been one of the leading manufacturers of vehicles up until the current time. At present, it is the producer and creator of many brands of automobiles and vehicles, and among its list is Ford.
Ford offers its clients and the world?s varying lifestyles reliable and affordable vehicles. It has made its way in the marking of milestones, and one of these is the Model T that...
used cars Refinance How Do I Know Whether Or Not I Will End Up Saving Money When Refinancing My Home Loan? Ford Your Way with Quality Ford Auto Parts
Refinance > Ford Your Way with Quality Ford Auto Parts
Debt Settlement
Debt Settlement
by: Janet Williams
What is debt settlement?
Debt Settlement is a process to settle your debts with the creditors. With debt settlement, a third party or you yourself negotiate with your creditors to come up with a reduced debt that you agree to pay. The reduction is usually between 30-60% of the total original debt amount.
Attributes of Debt Settlement:
Debt Settlement programs gives you a lot of options to clean your debts....
Refinance How Do I Know Whether Or Not I Will End Up Saving Money When Refinancing My Home Loan?
Refinance > Debt Settlement
Is Your Gambling Making You Money?
Is Your Gambling Making You Money?
by: Paul Mc
So you want to make your gambling pay?
Well would you be suprised if I told you that 99.9% of gamblers fail to make a consistent profit by gamblig?
Not suprised?
How about if I told you that a lot of these people don't have a clue about betting?
Its true!!!
Upto 90% of all bets are made by people who don't really know anything about the event they are betting on. The others may have...
Refinance How Do I Know Whether Or Not I Will End Up Saving Money When Refinancing My Home Loan? Is Your Gambling Making You Money?
Refinance > Is Your Gambling Making You Money?
Refinance
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