Refinancing your mortgage midstream

Posted by  on Mar 07, 2014

If you're thinking of refinancing your 30-year fixed-rate loan, your first step is likely to check today's mortgage rates to see how they compare to your interest rate. Before you begin the process of refinancing, you need to look at your overall finances and how long you intend to stay in your home. One more step to take is to look at your current home-loan documents to see how far along you are in your loan repayment schedule.

Refinancing and your amortization schedule

Your mortgage documents should include an amortization schedule that shows you exactly how much of your monthly payment goes to pay down the principal and how much is being paid in interest. You can also see your remaining loan balance from one month to the next. Even though your mortgage payments on a fixed-rate loan don't change, the amount of interest you pay does. In the early years of a 30-year loan, your payment is almost entirely interest. Then, as you make additional payments, more of each payment goes toward the principal. In the last few years of your loan, your payments will go almost entirely to reduce the principal balance.

While this may not matter to you on a month-by-month basis, you need to think about it when you're deciding whether it makes financial sense spend the 3 to 5 percent it costs to refinance.

Loan terms and refinancing

If you're in the early years of a 30-year mortgage, you may want to delay refinancing even if mortgage rates have dipped. Here's why:

·Your balance is still almost as high as when you took out the loan, so you won't reap the benefit of refinancing into a smaller loan.

·The payments on a shorter loan term are likely to be too high since your loan balance is still large -- unless you've received a big jump in pay.

·Your interest rate isn't likely to be much higher than today's rates, since mortgage rates have been lower than 5 percent since at least 2011.

On the other hand, if your credit has improved dramatically and you can get a lower mortgage rate than you're currently paying, the impact on your monthly payments could be significant. The long-term impact of paying less in interest over the life of the loan could be even more valuable.

If you're nearing the end of a 30-year mortgage, with less than 10 years to pay your loan in full, the cost of refinancing could be more than you'll recoup in savings. By now, your monthly payments are almost entirely going to reduce your principal rather than to interest. You can use a mortgage calculator to estimate the benefits of prepaying your loan rather than refinancing or consider refinancing into a short-term adjustable-rate loan with a low interest rate that's low enough to allow you to save in spite of the closing costs.

Consult a lender to see how your loan amortization schedule impacts your individual decision about refinancing.


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