Choosing the Best Time to Refinance your Mortgage

By: Richard Weber

Choosing to refinance your existing mortgage or home loan can be a wise and profitable decision, as you will likely be able to take advantage of lower interest rates from a different bank or lending institution.

It is possible to save hundreds or even thousands of dollars every month, but the trick is knowing what you need to do in order to have everything structured in the best possible manner to minimize your total cost.

If you are reading this, there is a good chance that you already have a mortgage, and you know that the size of your monthly payments depends upon the total value of the mortgage as well as the interest rate to which you and the bank agreed.

If you have a fixed rate mortgage, it will be easier for you to figure out whether refinancing your home loan will be a good option for you. If you have an adjustable rate mortgage, the calculation may vary but you should still be able to get a good idea of where your current interest rate is and what direction it will be headed in the next few years.

Most people pay attention to only the interest rate when looking to refinance their mortgage, but this can be a misleading methodology for a few reasons:

First, more important than just the interest rate is the TOTAL amount of interest that will eventually be paid back.

To illustrate this point, let's say that you got a $500,000 mortgage and you agreed to a 30-year period and a fixed interest rate of 9%. It has already been 18 years, so now you have only 12 years of payments left.

Now if you were to refinance this, you could get a new loan with a 5-year term, and even if you had an 11% interest rate with this new loan, you will still pay back less total interest. This is important to realize as it will save you more money in the long run, and if you are a person that only looks at the interest rates then you might not see the potential benefit of a refinancing situation such as this.

The point here is that even though the surface interest rate may be higher with a refinanced loan (regardless of whether it is fixed or adjustable), you may still be paying back LESS total interest over the term of the loan.

What your goal should be in terms of your home loan or mortgage is to minimize the amount of total interest that you will pay back to the bank, while making sure that the interest rate and time-period you have chosen will make your monthly payments as comfortable as possible.

You would not want to over-extend yourself financially by creating monthly payments that are too large, but at the same time remember that the smalle the payments are (and the longer the time you pay them) the greater the total amount of interest repaid will be.

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