During times of low interest rates, many home owners look to refinance their mortgage to gain some savings.
On a balance sheet, a mortgage is a liability and is used as one part in calculating a household’s net worth.
The first step in determining the impact of mortgage refinancing is looking at the payback period, which involves calculating the following:
∑ = Monthly Refinancing Savings @ lower interest rate > ∑ = Costs of Refinancing
When reviewing the numbers above, look to see what month the savings are larger then the costs of refinancing.
Another item to review is the amortization schedule. Compare the remaining amortization schedule of the existing mortgage against the amortization schedule of the new mortgage. In this method, the amortization schedule will include the costs of the refinancing in the principal balance. Then subtract the monthly payment savings between the two mortgages from the new mortgage’s principal balance. Review the month that the savings start occurring.
By using the above as a base to calculate your savings for refinancing your mortgage, it will provide you a good idea on determining what the real payback period is when you refinance your mortgage and if this is worth it for you.
Amortization calculators are normally found on websites that have Mortgage Calculators. Use these to assist in calculating the above however be sure that the website that you refer to is credible.
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