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  • In our previous articles we learnt how to work out the costs of a refinance mortgage. Now you have this information you are ready to work out if a refinance is good news for you. You can do this by hand, but I recommend you use an online refinance calculator. Bankrate, Lending Tree or Realtor all offer free refinance calculators.
    The calculators above will tell you how many months (or years) you will have to stick with your new refinanced mortgage before you start saving money. This is done by working out the monthly savings in interest payments you get by having a lower interest rate and calculating how many months it will take for those savings to pay off your closing costs and prepayment penalty fees.
    For instance, if you have a:
    – 20-year mortgage
    – Monthly payment of $1,118.36
    – a balance of $150,000
    – a 6.5 percent interest rate
    – Prepayment penalty 2 percent.
    and you refinance it for
    – a 20-year mortgage
    – With a 5.5 interest rate
    – $1,5000 (1 percent) in closing costs
    – Monthly payment of $1,031.83
    You will have to stay in your home for 1 year and 4 months to start saving money. This should help you decide if the mortgage is good for you. If you are planning to sell in the next two years, refinancing your mortgage is not worth the hassle. However, if you are planning to live in your home for the foreseeable future you could be on the road to substantial savings. In our previous example you were saving around $86 a month, which in a 20-year mortgage, can save you over $20,000. That, I am sure you will agree, is worth the effort of filling in a few forms and spending a few hours online or at the bank.
    Other factors to consider when choosing a refinance mortgage are the term of the new loan and the type of interest rate. Sometimes homeowners will refinance their home to pay their mortgage off earlier. This can provide huge savings on a mortgage. The catch is your monthly payments will not drop by much or could even be higher, but the overall savings would be much greater.
    Another popular term to change when you refinance is your interest rate type. There are three main types of interest rate: fixed-interest rates, variable-interest rates and adjustable rate mortgages (ARM).
    Fixed rate mortgages have the same interest rate throughout the life of your mortgage. They are great for people who expect to have a similar income for the foreseeable future or who like to play it safe and know how much their mortgage payments will be every month. Variable-rate loans begin with lower interest rates but the rates can rise or drop throughout the life of the loan.
    The middle ground between fixed-rate and variable-rate loans is an ARM. ARMs behave like a fixed rate for a set period (anything from 6 months to 10 years) and then adjust to a variable rate. Of course, there are all kind of variations on these three models you can choose from.
    So, before you run to the latest “great deal” in mortgage refinancing take the time to do the math. This will help you check if there are savings in it for you and if they are worth the effort of changing lenders.

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