Do Your Math Before Applying for a Mortgage Refinance

If you have an adjustable rate mortgage that is about to reset to an overly inflated interest rate, you may want to immediately consider a mortgage refinance. Even if the interest rate that you sign on for now is a bit higher than your current rate, it may very well be lower than the rate you'll be paying in the future. For everyone else, however, there is some math that you should do before applying for a mortgage refinance. It's not terribly complicated, so just get a calculator and piece of paper and we'll walk you through it.

The first thing you need to do is to find out what new interest rate you may be eligible for. This will depend on your credit score and other details about your current financial situation, but your bank or lender should be able to pre-qualify you. You can tell them that you're considering a mortgage refinance; if they think you're going to take your mortgage business to someone else they may work with you to offer the lowest rate possible. Make sure that the interest rate you're qualified for in a mortgage refinance is lower than your current rate, but even if it's a quarter of a percentage, you may still save quite a bit of money, so don't let that put you off from doing the rest of your math.

You then need to take the remaining balance on your current mortgage and the new interest rate you would get through a mortgage refinance and run those through a mortgage amortization calculator. This will tell you how much your new monthly payment will be and how much you will wind up paying in interest.

Next, you need to know the fees involved in your mortgage refinance plan. These fees will include a prepayment penalty, loan origination fee, appraisal fee, broker fees, and points. Your current mortgage paperwork should tell you the prepayment penalty, and your mortgage refinance lender will tell you the additional fees.

Take all these fees and costs from your mortgage refinance and add them up. Now, take your new mortgage payment that you figured from your amortization calculator and subtract it from your current payment. For example, if your current payment is $1,500 and your new payment would be $1,200, you want to remember that $300 difference.

You need to take those fees and costs from your mortgage refinance and divide it by the difference in monthly payments. This means that if those fees are $3,000 and your new payment difference is $300, divide $3,000 by $300. This number will tell you how many months it will take for your mortgage refinance to pay for itself. If it takes years for you to recoup the cost of a mortgage refinance and there isn't much difference in how much interest you'll wind up paying, then it may not be worth the time and effort. But if you can save thousands, then now's the time to consider this wise financial move.