Home Mortgage Refinancing Options

When you wish to opt for home mortgage refinancing, you have carefully consider all the choices available to you so that you arrive at a solution that is cost effective and at the same time suits your current and future income. Answering the following questions would help you to make an informed decision on home mortgage refinancing.

• What is the common mistake a person makes while calculating the benefits of home mortgage refinancing?
• What is a breakeven period?
• How is a breakeven period calculated?
• What is a ‘no cost’ refinance?
• What are the relative advantages and disadvantages of home mortgage refinancing compared to a second mortgage?
• How is the home mortgage refinancing decision related to extra payments decision or early payoff decision?
• How to measure the costs as well as the gains from home mortgage refinancing?
• Why do most of the refinancing decisions go wrong?

Home mortgage refinancing involves extra costs. Let us consider an example. You resorted to a mortgage loan for a period of 30 years at an 11% fixed interest rate. The mortgage still has 21 years to go and the present due is $1,00,000. Now you are refinancing it as a 15-year mortgage loan at 7% interest rate. In this process, you incur a cost of $3,750.

Let us assume that the monthly repayment amount on the old loan was $1,019, while it is $899 for the new loan. As such, your monthly repayment had got reduced by $120. If you divide the new loan cost of $3,750 by $120, you get 31 months, which should be your breakeven period. However, the new loan is for a shorter term and the interest rate is also lower than the first mortgage. Hence, the above rule of thumb method calculation would be overstating the breakeven period. If you use correct loan calculators, you would find out that your breakeven period is not 31 months in this case but it is only 12 months.

If the rebate offered by a lender covers the new loan costs, then such home mortgage refinancing is known as no-cost refinance. To cite an example, a lender might offer a 2-point rebate on a 30-year loan at 5.75% interest rate. For a 6.5% interest rate, the rebate might be zero and for a 7% rate, the rebate might be 1.5 points. If the 1.5-point rebate covers your new mortgage loan costs, then the 7% interest rate is the no-cost rate. Generally, no-cost refinancing is better, if the repayment period of the new home mortgage loan is shorter. If the period is longer, the deal might prove to be a costly one.