Freddie Mac Budget Worksheet: Fill & Download for Free

There are numerous “rules of thumb” about refinancing. They claim that you should refinance only if you can lower your interest rate x%.These rules are universally wrong—and in many cases, they are harmful, as they cause homeowners to refrain from lowering their rates when they could benefit, thereby forgoing thousands of dollars in savings.There is a simple method to determine whether it makes sense to refinance. First, look at your current mortgage statement. Write down your balance and monthly payment of principal and interest—don’t include the taxes and insurance, as these won’t change when you refinance.Next, get in contact with a mortgage lender in your area. You will not be making any sort of commitment to do business with them at this point, but you will be asking them for some important information.You should have some idea of your credit score. You can get this from one of the several free sites. Your credit score will determine the interest rate you can get. Be aware that all lenders are working with the same guidelines—those put forth by Fannie Mae and Freddie Mac. These guidelines include risk-based pricing, which calls for adjustments to the cost of your loan according to your credit score and loan to value ratio.You want two pieces of information from the lender: the interest rate you might be able to get today, and the non-recurring closing costs for your loan. When you speak with the loan officer, you can tell them you are looking for a loan of a certain amount, that your home is worth whatever you think it’s worth, and your credit score is whatever you believe it to be.This is enough information for any lender to give you a very good idea of the rate they’d be able to offer you if you began the process and locked your rate today.The loan officer should also be able to give you a close estimate of the non-recurring closing costs for a new loan. These are the costs and fees that you’ll incur only as a result of getting a new loan. They are separate from recurring items, such as prorated interest and deposits to a new impound account for taxes and insurance, assuming you choose to have one.Non-recurring closing costs include title insurance, escrow fees, appraisal, lender fees for underwriting and processing, notary and recording. In most cases, borrowers choose to add these fees to their new loan rather than pay them out of pocket.Ask the loan officer to prepare a closing cost worksheet. This will itemize all the costs for the loan. Protip #1: don’t ask for a “good faith estimate.” This document is obsolete and no longer exists. You also don’t need a Loan Estimate at this point. This is a legal document required for compliance. A lender must provide one to the borrower once they have submitted an Application. Legally, your status is one of credit inquiry. Because the Loan Estimate is a legal document, the lender’s process to prepare one is not trivial. Those people who say you should gather loan estimates from three or four lenders are unfamiliar with the real world of mortgage banking. While you could submit applications with multiple lenders—including enough personal information for them to underwrite the loan and issue a lending decision—there is no advantage to you in doing this. You are looking for information you can use to make a decision whether or not to proceed with a refinance.Now that you know what the non-recurring closing costs are, along with the rate you’re likely to get, you can do some simple calculations on which to base your decision.For this example, we’ll say that your loan balance is $300,000, your rate is 4.75% and your monthly payment (principal and interest only) is $1,675. You learn from the closing cost worksheet that the non-recurring closing costs amount to $4,000. You can get a new loan with a rate of 4.25%. You would add the closing costs into the new loan, so your new loan balance would be $304,000. Your payment would drop by $180 per month. This may seem like a worthwhile amount to save each month.Protip #2: Disregard the amount you “save” each month. It is misleading. Your payment will drop for two reasons: you will have a lower interest rate—that’s the whole point of refinancing—but you will also extend the term of your loan. In this example, your old loan had 26 years remaining. Amortizing a new loan over a longer period will lower the payment even if you did not lower the interest rate.You reduce your rate by .50%. Multiply your current loan balance of $300,000 by that amount. This is how much you’ll actually save each year: $1,500. Divide the non-recurring closing costs, by the annual interest savings. In this example, 4,000 divided by 1,500 is 2.67. This is the time it will take to recover the cost of getting the new loan. That is your “break even” point.If that number is acceptable to you, proceed with your refinance. If it’s not, don’t. it is as simple as that.There are other calculations you could do, such as your net savings at certain time horizons—5 years, 10 years, life of loan—but the simple calculation I’ve described here is enough for you to decide objectively whether to move forward.There is one other simple calculation you might employ if you are hoping to pay your mortgage off as soon as possible. For this, you’ll need one of the myriad amortization calculators available on the web. Find out how much you’d shorten your loan’s term if you increased your monthly payment over the one called for in the new promissory note. Some borrowers refinance to lower their interest rate, but choose to make the same payment as before. This is a painless way to make “extra” loan payments. For our example loan, reducing the rate to 4.25% from 4.75% but continuing to make the same $1,675 payment as before will shorten the new loan’s term to 24 years, cutting two years from the time needed to pay off the home.One bit of advice from a long-time loan officer who has helped thousands of people refinance their mortgages: make a plan for the money you’ll save by refinancing. If you don’t the money from the reduced payment will simply be absorbed into your budget, and you won’t notice any difference in your life. If you can allocate the reduced payment either to pay off more expensive debt, or to retiring your mortgage faster or some other worthwhile purpose, you will have used the refinance to the maximum advantage beyond mere bragging rights to having lowest rate in your neighborhood.I hope this is helpful.