Refinance > Three Rules of Thumb for Mortgage Refinancing

Three Rules of Thumb for Mortgage Refinancing

by: Stephen L. Nelson, CPA

You might think that deciding to refinance a mortgage requires only a quick comparison of loan interest rates. Unfortunately, that?s not really true. Refinancing is trickier than that! Fortunately, three useful rules of thumb can often help you make sense of refinancing opportunities.

Rule 1: Don?t Ignore Total Interest Costs

You really want to use refinancing as a way to reduce the total interest cost you pay. While that sounds simple in principle, it is sometimes difficult to do.
The interest costs you pay are a function of the interest rate, the loan balance, and the loan term period.

When people refinance, they tend to focus solely on the loan interest rate. But they often don?t pay as much attention to the loan term or the loan balance.

When you use refinancing?even refinancing at a lower interest rate?to increase your borrowing or to extend the time over which you borrow, you often aren?t saving money.

Rule 2:
Trade Expensive Money for Cheap Money

For refinancing to make economic sense, however, you do need to swap higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that will be charged on your new loan?this is the best measure of the new loan?s interest rate cost?and then compare this to the loan interest rate on your old loan.

You don?t want to compare interest rates on the two loans nor do you want to compare annual percentage rates on the two loans. Again, just to make this perfectly clear: You want to compare the loan interest rate on the old loan to the annual percentage rate on the new loan.

When the annual percentage rate on the new loan is lower than the loan interest rate on the old loan, then you are truly paying a lower interest rate.

Comparing annual percentage rates with loan interest rates seems confusing at first. But note that you would pay only interest on your old or current loan, so that?s all you need to look at in terms of its costs. With a new loan, however, you would pay both interest and any origination or closing cost fees. The annual percentage rate wraps the interest rate charges and setup charges, origination charges, and closing cost fees into one interest rate-like number.

Rule 3: Don?t Lengthen the Repayment Period

Be careful that you don?t extend the length of time you borrow by continually refinancing. For example, one common rule of thumb states that every time interest rates drop by two percentage points, you should refinance your mortgage. However, there have been times in recent history when following this rule would have had you refinancing your mortgage every few years. This could mean that you would never get your mortgage paid off. If you refinanced every few years, you would suddenly find yourself still 30 years away from having your mortgage paid.

About The Author

Bellevue WA accountant Stephen L. Nelson, CPA, MBA is the author of both Quicken for Dummies and QuickBooks for Dummies and an adjunct tax professor for Golden Gate University?s graduate tax school.

steve@stephenlnelson.com

Adjustable vs Fixed Rate Mortgages

Adjustable vs Fixed Rate Mortgages

by: Max Hunter

Mortgage rates can either be fixed for the duration of your loan or can be adjustable. An adjustable rate mortgage is a loan that is set up with an interest rate that changes based on pre-determined criteria, primarily tied to the federal interest rate. If the interest rates are up, then your interest rate on your loan will be higher, if the interest rates are low than the interest rate on your loan will go down.

Adjustable rate mortgages (ARM) are generally fixed interest rates for a period of time and then become adjustable. Generally speaking the introductory interest rate for an ARM loan will be lower than a fixed rate mortgage. This is done in order to lower initial payments and allow people to take out larger mortgages, or give them smaller payments for the introductory period. This is attractive to people who may know that their income will be increasing over that period of time.

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Adjustable vs Fixed Rate Mortgages

Refinance > Adjustable vs Fixed Rate Mortgages

Cash-Out Mortgage Refinancing

Cash-Out Mortgage Refinancing

by: LendingTree Editorial Staff

Your house is a potentially large source of ready money if you are willing to sacrifice some of your equity in return for liquidity. Cash-out mortgage refinancing is one way to access this cash.

What is cash-out mortgage refinancing?

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Refinance Quote - Get The Best Refinance Quotes You Can Get

Refinance Quote - Get The Best Refinance Quotes You Can Get

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Refinance > Refinance Quote - Get The Best Refinance Quotes You Can Get

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Using Refinancing to Secure Lower Interest Rates

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When the time comes to finally buy the house that you've been dreaming of, you might find that the market isn't right to give you the interest rate that you want. Of course, it's not always a good idea to wait and see if rates improve? the home of your dreams might be sold right under your nose.

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Below you'll find some basic information about refinancing a mortgage loan, and how refinancing can be used to secure a lower interest rate than the original rate on your mortgage.

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Using Refinancing to Secure Lower Interest Rates

Refinance > Using Refinancing to Secure Lower Interest Rates

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Bad Credit Refinance 101: The Hows and The Whats

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Refinance Three Rules of Thumb for Mortgage Refinancing online degree

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