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Deciding if it is a good financial decision to refinance your mortgage is not always straightforward. An enticing reduction in interest rates could make a refinance attractive, but there hidden costs and other factors that could easily outweigh the savings of an interest rate reduction. A great tool to decide if a refinance deal is worth taking is a mortgage refinance calculator. These online calculators allow you to introduce all the terms and details of your old and new refinance mortgage to help you work out the real cost or savings of the refinance.
Before we show you where to find these refinance calculators you need to understand two more elements of smart refinance decision making: the cost of refinancing and the length (or term) of the loan.
Calculating the cost.
Refinancing a loan involves two operations: cancelling the old mortgage and opening a new one. Each operation incurs its own expenses. Many mortgages come with clauses that charge higher interest rates when the balance is paid off early. These are called pre-payment penalties. It is important to work out carefully how much it will cost to pay your mortgage early because the cost can be prohibitive and make the whole operation pointless. Closing a mortgage also involves red tape expenses. The new lender might also require a valuation of the property, mortgage insurance or hefty “opening” costs, which all add up. This is why it is a good idea to start by asking your current lender for a refinance as this will probably reduce the processing costs of the refinance.
Loan Term, the cost of time.
One of the less considered factors of a mortgage is also one of the most important: the length of the loan’s term. Interest is paid on the balance of a mortgage. This interest is paid every month, two weeks, or year depending on the loan. The shorter the term (or length) of a loan the less interest you pay. Let us illustrate. Imagine you ask your boss for a $1,000 loan. He agrees, but asks you to pay a 10% interest every month until you pay him back. If you take one month to pay back the loan will cost you $100. If you take five months the cost will be $500 and so on. The less you take to pay back the loan the less interest you pay. The same occurs with mortgages. We often focus our attention on the monthly cost of the mortgage and forget the overall cost in interest. Therefore if you are refinancing your mortgage try and reduce the length of the mortgage. If your current loan is a 30-year mortgage, try and reduce it to a 20 or 15-year mortgage. This might leave your monthly payments the same or slightly higher, but you will save a lot of money in interest.
To know if you are saving or spending money on a mortgage refinance you need to crunch all the numbers. The links below will take you to mortgage refinance calculators that will help you work out the real cost of your refinance.
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