Investment & Financial Articles
Title: Should I Refinance?
Author: Barrett Niehus
Article:
Should I Refinance?
By Barrett Niehus
Interest rates are at an all time low. Lower in fact than they
have been in forty years. With this low rate comes huge
opportunity for home owners to lower their payments and take
some equity out of their home. The question about weather
refinancing is necessary is dependent on your current financial
situation, and what you will save versus how much the refinance
will cost. The analysis is a simple one, but one must understand
the process in order to benefit from the refinance activity.
When weighing the decision to refinance, one must simply look at
your current monthly payment and your remaining payoff period.
Then compare this to the monthly payments and required payoff
after the refinancing activity. If the benefit of refinancing
outweighs the cost of the process, then the refinance makes
sense.
The easiest way to evaluate if a refinance makes sense from a
quantitative sense is to list your current monthly payment the
amount left on your mortgage, and the number of payments that
you have left. Multiply the number of remaining payments by your
current monthly mortgage payment and list this under all of the
numbers.
Next to these numbers write down the amount that you are
refinancing, the refinance period, and the estimated monthly
payment. The payment amount can be calculated using a
spreadsheet, or possibly a mortgage calculator like the one
found at http://www.freetrainer.com/overview.htm. Within the
amount that you are refinancing, be sure to include the cost of
the refinance, origination fees, appraisal fees and transfer and
escrow costs. Once again, multiply the monthly payment by the
total number of payments and record this number.
If you are refinancing your current mortgage and not taking out
any equity, the refinance makes the most sense if you can reduce
your monthly payment, and if the total amount paid (number of
payments multiplied by the monthly payment) after the refinance
is less than the total amount to be paid on your current
mortgage. If the monthly payment is less than your current
payment, but the overall amount is greater, you must decide if
paying less monthly outweighs the increased amount you will need
to pay. The opposite decision is required if your payment goes
up but the total amount due decreases. If in either of these
situations, care must be taken and the returns evaluated
carefully to make the best decision.
A caveat to the above analysis is that the amount refinanced
must be equal to the existing mortgage. If the refinance amount
exceeds the amount currently due on the mortgage then a much
more complex analysis is needed. For this type of analysis, you
will require a spread sheet with present value and amortization
calculations. If you are not comfortable with these type of
calculations, consult a financial advisor or accountant to
assist with quantifying your decision.
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About the author:
Barrett Niehus is the Managing Director or IP Ware Real Estate
Investment Analysis Software, http://www.freetrainer.com
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