Are you a serial refinancer? Do you constantly compare mortgage rates, hoping to find a better deal? While it is smart to shop for the best mortgage rates possible when financing a home, it is important to understand how repeatedly refinancing a property affects the amortization schedule.
Best mortgage rates
The U.S. is experiencing some of the lowest mortgage rates in history. So many borrowers have moved quickly to refinance mortgages for the most affordable monthly payments possible. Mortgage rates for a 30-year fixed-rate loan were averaging around 4.43 percent in July 2011, according to Shoprate's mortgage data. If you refinanced when mortgage rates were around 5.5 percent or higher, you may be itching to get a better deal.
Starting over again
Choosing to refinance at this time could shave some money off your monthly mortgage payments and/or reduce the amount of principal. But it could also affect how much money gets added to your savings over time. You may actually end up with less money to build up a nest egg. That's if you're restarting the 30-year repayment again by refinancing. If you bought your home five years ago, you probably took out a 30-year loan. If you then refinanced a couple of years ago, you would have restarted the 30-year clock, and if you refinance again, you'd be restarting it again. Even with a lower mortgage rate you might pay more over the loan's life because you'll be paying it over in 35 years, not 30.
Consider refinancing to a shorter term like 15 years. You may not end up with lower monthly payments, but you will likely shave thousands of dollars off the interest paid over the life of the loan.
So what actually happens to the amortization schedule if you decide to refinance again? Suppose you refinanced a $200,000 mortgage two years ago at an interest rate of 5.5 percent for a 30-year term. You would have ended up with monthly payments of $1,419.47. Interest payments on the loan would be $261,010 and you would end up paying a total of $511,010. Shoprate's amortization calculator shows that after two years the mortgage balance would be $243,075.
Refinancing the $243,075 mortgage balance at the current 30-year rate of 4.43 percent, would result in monthly payments of $1,221.54. The interest payments would be $196,678 for a total loan payment of $439,753. In this case, refinancing saves you money.
If you want to shave off even more interest, refinance into a 15-year mortgage; rates averaged 3.83 percent in July 2011. Monthly payments on the 15-year mortgage loan would be $1,771.36 and interest payments would be $76,850. The total amount owed over the life of the loan would be $319,925. If you can swing the higher monthly payments, this might be the best option if your goal is to pay as little as possible.
Review mortgage quotes
Get multiple mortgage quotes to determine if refinancing is the best move right now. In addition to considering mortgage rates, think about how long you plan to remain in your home and whether he amount saved would be enough to offset the costs of refinancing.