Before you decide to refinance a current mortgage, it is crucial to understand the benefits and costs of the entire process.
You can find a wide array of online calculators that will tell you the breakeven period depending on a cash flow.
As soon as you check here, you will learn everything about international organizations for lending institutions.
At the same time, they will help you how long you should wait to recoup closing costs for getting lower monthly installments.
The information you get can help you, but it is not enough. You should comprehensively review how the interest rate will affect the new loan.
Suppose you wish to determine whether refinancing will change your finances. In that case, you should follow the tricks we will provide you in the further article.
That way, you will have everything you need about the existing and replacement loans.
Table of Contents
Calculate an Original Loan
You probably know the size of your monthly payment and how much you owe. But it is vital to determine how much of each payment reduces the balance and how much goes towards interest expense.
If you wish to get this information, you should create an amortization table. Apart from Google Sheets, you can use Excel combined with an online calculator or other software to help you out with the process.
We will present you with an example of calculating a refinancing option by using Excel or Google Sheets.
You should implement these details:
- Amount: $200,000
- Date: 10 years ago
- Interest rate: 5.4%
- Term: 30 years
Suppose you wish to get the details of your original loan. In that case, we recommend you use an amortization calculator and input the relevant information, not the amount you currently owe.
It means you are paying monthly $1,123.06 for the next thirty years.
When you note where you stand with a current loan, you should scroll to its balance and see how much you still owe. You should scroll down to the tenth year to see how much you still owe.
Using our example means you are paying monthly $1,123.06 for the next thirty years. At the same time, you owe $164,611.06, which means you paid $135 thousand in ten years. Of course, numbers vary depending on how precise the calculator or software you use.
Calculate the Refinance Loan
You should figure out how the new loan (søke refinansiering) should look if you decide to refinance. It would be best if you input these figures
- Loan Amount: It is vital to copy the amount you currently owe, $164,611.06.
- Start Date: Today
- Refinanced Loan Interest Rate: 4.25%
- Term: 30 years
You will first notice that the monthly payment was reduced to $814.61, three hundred dollars less than the original. It is a great solution and logical because the new loan features a lower interest rate and overall amount.
It is vital to save monthly payments, but you should also consider other factors. If you can afford more than $814.61 monthly installment, you can consider adding a term to lower length.
Generally, shorter terms come with low rates, which will help you build equity and pay off the mortgage.
Suppose you refinance the thirty-year loan into twenty years, for the same amount mentioned above. In that case, you will pay higher monthly installments or $1,023.72, which is similar to the original loan.
It is challenging to determine a term before refinancing. Therefore, you should project what may happen in the next twenty to thirty years and decide based on the assumptions.
Through assumption, you can determine whether you wish to keep a new loan or not. For instance, if you want to stay in the household in the next ten years or thirty years. The answers will help you determine the best course of action.
Determine Interest Expenses
It would be best to determine how much you will spend on interest with current compared with a new loan. With each table, you can check the interest column.
Check out the latest month, and continue down to determine how much you will pay for it in the next twenty years.
We recommend calculating each loan in a separate spreadsheet by copying and pasting the amortization table. You should add numbers with ease and understand the difference between them.
Suppose you decide to keep the existing loan. In that case, you will spend a hundred thousand dollars in interest until you pay off everything.
On the other hand, you will need to pay $128,953.64 in interest if you refinance until you finish with everything.
Visit this site: https://www.federalreserve.gov/releases/h15/ to check the latest Federal Reserve guide on refinancing.
Suppose you decide to repay in the next ten years. The amount will drop, which is a crucial consideration. As you can see, you will pay $28 thousand and get a lower monthly period for the next thirty years.
Then, it would be best if you refinanced with ease, which will offer you an advantage of lower payment and reduced interest costs.
Closing Expenses
If you wish to refinance, you should also think about closing costs. It is one of the most critical factors that will help you determine whether you should refinance or not.
You can find calculators online that will offer you a breakeven formula, which will show how long you need to wait until you recover the money you spent.
Divide the monthly savings with the total closing costs, and you will notice the number of months you need for the process.
Suppose you decide to roll the amount into an overall debt. In that case, you can avoid additional charges because they will come in monthly installments.