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Updated for the spring homebuying season - homebuyer mortgage assistance programs by state

How to maximize your refinance savings

Refinance applicationThe main draw for most refinancing homeowners is to save money on your monthly mortgage payments. According to a new study from the National Bureau of Economic Research, the median household who doesn’t refinance could be losing out on approximately $11,500.

So, when considering a refinance, do not simply compare the refinance rate with your current mortgage rate to determine how much money you will save each month. Lowering your interest cost is an important goal, but you must also consider the following factors to save the most money through a mortgage refinance:

  1. The total cost of refinancing
  2. When you will begin to save money each month
  3. The length of the new mortgage term
  4. The new mortgage payment
  5. What to do with the monthly savings

Here are some important calculations to consider to get the most savings out of your refinance:

When will I begin to save money?

To calculate when your refinance will actual begin to save you money, take the total cost of your refinance and divide it by your monthly savings after you refinance. This will tell you how many months it will take to pay off the refinance. You will need to live in the property longer than this number of months to actually realize any savings. Use HSH.com’s refinance calculator to learn exactly how long it will take for you to begin saving money.

Can I shorten my refinance term?

 Another important refinance calculation is to determine whether you will take a longer or shorter-term loan on your refinance. If you are refinancing, say, your current 30-year loan into a new 30-year loan, determine how many years you can shave off your mortgage term by making your “old” payment on your newly refinanced mortgage.

Let's say your “old” mortgage has 25 years left on it, and refinancing at current rates lowers your monthly payment by $400 each month. If you apply your old cost to your new monthly payment (i.e., prepay your mortgage an extra $400 per month), how soon until the mortgage is paid off? More than likely, by paying that extra $400 each month, you could pay off your mortgage in fewer than 25 years--possibly saving you tens of thousands of dollars.

A refinance calculator can help you determine how fast you will pay off your refinanced mortgage.

Can I invest my refinance savings?

Mortgage refinancing can save you tens of thousands of dollars. If you’re not strapped for cash, be sure to have a plan in place for the money you save from refinancing. Will you invest in your child’s education? Do you plan to prepay your mortgage so you can pay off your loan early? Are you going to add your monthly savings into a 401k or another retirement savings account?

Low mortgage rates are not going to last forever. If mortgage rates rise substantially, you could miss out on your opportunity to save thousands on your mortgage. Be sure to run some financial calculations to see just how much you can save, and have a plan in place for your savings to get the most out of your mortgage refinance.

(Image: KLH49/iStock)

Related links:

Mortgage calculator

Mortgage prepayment calculator

Current mortgage rates

More help from HSH.com

  • Streamline Refinance Program to Replace HARP

    The HARP refinance program for troubled or underwater homeowners will come to an end in 2017, but a new streamline refinance program will takes its place.
  • How do I know refinancing will be affordable?

    After to determine the goal of your refinance, deciding whether that goal makes sense (or not), given your personal situation, depends on a combination of factors.
  • 12 ways to get the lowest mortgage refinance rates

    To get the lowest mortgage refinance rates, first prepare your finances and then shop for interest rates with certain strategies in mind. Here are 12 ways to ensure you lock in the lowest refinance rate possible.
  • Can I refinance an FHA second property through HARP?

    You should know that lenders are free to do their own "overlays" as to which programs and borrower criteria they will write loans for.
  • What is HARP and do I qualify for a HARP loan?

    Over 800,000 households are still eligible to refinance under the federal HARP program. Are you one of them?

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