Refinancing: Getting the Most from Your Next Mortgage

Lowering mortgage rates is the starting point for reviewing refinance mortgage options, but refinancing may offer additional benefits depending on your current mortgage and financial goals. Here are tips for determining which refinance mortgage works for you.

Before Requesting Refinancing Quotes

Knowing what you want to accomplish by refinancing narrows your options to mortgages that meet your needs. Potential benefits of refinancing may include:

Lowering your current mortgage rate: Dropping your mortgage rate lowers monthly payment and can help you retire your mortgage sooner. Compare two $300,000 30 year loans. One loan has an interest rate of 6.25% and the other carries a mortgage rate of 5.25%. The interest paid over the 30 year term at 6.25% is $364,976 and the payment is $1,847. The interest paid at 5.25% over the 30 year term is $296,380, and the payment is $1,657.

Converting your adjustable rate mortgage (ARM) to a fixed rate mortgage (FRM): Low mortgage rates make FRM loans more affordable. Converting to an FRM eliminates changes in your mortgage rate and payment. Using an affordability calculator helps with estimating how much you can afford to borrow based on a target P&I payment amount, mortgage rate, and repayment term.

Eliminating mortgage features like interest only payments, negative amortization,or balloon payments: After an introductory period, such features can cause mortgage balances and monthly payments to increase (negative amortization), or loan balances to remain static (interest only payments). Refinancing to a fully-amortizing mortgage can help you retire it faster while avoiding surprise adjustments in mortgage rates, payments, and your balance. Balloon mortgages become due and payable within a few years, but are amortized over 30 years. This results in a large balance (balloon payment) due at the end of the mortgage term; refinancing to a fully-amortized FRM eliminates the balloon payment.

Providing additional cash for debt consolidation, home improvement, or other expenses: If you have enough home equity, you may qualify for a cash-out refinance. Home equity is the approximate difference between your home's current value and the liens against it. For example, your home is worth $300,000, your first mortgage balance is $220, 000 and you have a $6,000 home equity loan balance. Your total mortgage debt is $226,000. Dividing $226,000 by $300,000 provides your home's combined loan to value ratio (CLTV), which is approximately 75%. Conventional mortgage lenders typically grant cash-out refinances to 80%, but FHA lenders may go to 85%.

Saving on interest paid over time: Whether or not refinancing makes sense largely depends on how refinance options compare to your current mortgage. Using a mortgage comparison calculator provides estimated savings; for estimates, enter identical mortgage amounts and rates, but vary the repayment terms. On the $300,000 example above, you could choose to refinance to 5.25% but pay the 6.25% payment of $1,847, retire the loan in only 23 years, nine months, and pay $224,740 in interest -- a $140,236 savings!

Use mortgage calculators for comparing refinance quotes

Free online mortgage calculators are helpful for estimating potential savings between refinance quotes, and for comparing your current mortgage loan to potential refinancing terms

Comparing refinance mortgage quotes: Use a comparison calculator for determining if you can take cash out, or if refinancing to a shorter repayment term is feasible. Enter the loan amount, mortgage rate, and repayment terms for each loan you're comparing.

Estimate potential savings and break-even period: The mortgage refinance calculator can help estimate potential savings and also establish how long you'll have to make lower payments before recouping refinancing costs. Enter your mortgage balance, monthly P&I payment, and the number of months remaining on your loan. Next, enter your refinance mortgage rate, repayment term, and estimated closing costs and points.

Researching refinancing options is worthwhile; it can help you find a best mortgage meeting your particular needs and budget