Refinancing mortgage rate

Mortgage refinancing is not just reducing the monthly mortgage payments. It can also mean a change in the loan term. If the new refinance mortgage loan has significantly lower interest rate than the old loan, the break-even period will be achieved within a short period of time. But if the interest rate of the new loan is only slightly lower than the old loan, the break even period will come much later.
To illustrate, a 30-year home loan was taken in 1997 and the existing mortgage balance is now $150,000 with 20 more years to go from 2007. The interest rate of this loan is fixed at 11% and the monthly payment is $1,200. If the homeowner gets mortgage refinancing, he or she can lower the interest rate of 7% and, at the same time, the loan term can be reduced to 15 years with a monthly payment of $900. This mortgage refinancing will cost $3,600. The difference between the old monthly mortgage payment and the new monthly refinance mortgage payment is $300.

Many homeowners estimate that by dividing the refinancing cost of $3,600 by the difference in monthly payments, which is $300, the break-even period will come within 12 months. With this rough calculation, the homeowner might be planning on selling the house after 12 months. But this may not be entirely accurate. In such a case, the difference in the mortgage balance will be taken into consideration and the difference of interest rates between the new loan and the old loan might be higher. A higher difference imply a shorter waiting time for the break even period. All these assume that the new refinance mortgage loan has a shorter term than the old one. If the case is the other way around, and the new loan has a longer term than the old one, the break-even period might come only after 15 months, especially if the interest rate difference is not much.