Mortgage Calculations
There is the balloon mortgage loan, in which you can make the monthly payment for the scheduled loan term, say 5 years. After that, the borrower should pay off the remaining balance in a lump sum in a single payment. This loan can also be converted to a fixed loan at the end of the mortgage period or the borrower can go for refinance.
Use the amount you owe on the loan to calculate what the new monthly payment would be by using a financial calculator or an online mortgage calculator. You’ll need to know the new loan amount (current loan amount plus closing costs, such as points, title and escrow fees - unless you plan to pay for them out of pocket - the new interest rate, and the number of months of the new loan).
Subtract your current monthly mortgage payment from the new monthly mortgage payment; this is your monthly savings. Divide the monthly savings into the total cost of the loan (including points, title and escrow fees). This is the number of months it will take to recoup your investment.
At one time, the general rule of thumb was that it paid to refinance only when the current rate is two percentage points lower than what you are currently paying. But with the advent of “no- cost” refinancing options, that precept is no longer valid. However, the term “no-cost” is something of a misnomer.
It doesn’t mean free; it means you won’t have to pay anything out of your own pocket at the time of closing. Either the fees charged by the lender will be rolled into your new loan balance or the rate will be somewhat higher than you could obtain if you paid the lender’s charges up-front.
Since refinancing means you’re starting the loan process again, you’ll have to go through essentially the same process you did when you took out your current mortgage. First, you’ll have to get all your records together and make sure your credit profile is in good order.
That said, you have an advantage with refinancing if you have a good payment history with your current loan. Lenders can see that you’re a good risk, and that makes the qualifying process easier. Also consider refinancing to change the term of the loan. While a shorter term loan’s monthly payments may be higher, you’ll build equity faster and save hundreds of thousands of dollars over the life of the loan.
A 15-year conforming loan at the recent average rate of 7.3 percent costs $2,197.65 a month in principal and interest, compared to $1,678.12 a month for a 30-year loan at the 7.5 average going rate. However, halfway through the term of the 15-year loan, your balance will be $151,959.76. Seven and a half years into the 30 year loan, you’ll still owe $218,569.14. Over the life of the loan, the 30-year deal will cost you a total of $604,116.78 in principal and interest, while the 15-year loan will put you back only $395,573.95
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