Is Now a Good Time to Think about Home Refinancing?
On the surface, home refinancing can seem to offer innumerable advantages to
homeowners. If you are considering refinancing your home; however, you
should consider whether now is the right time for you to approach
refinancing. Timing to reap the most benefits from refinancing is
partially dependent on the current market and economy; however, it is
also dependent on your own personal situation.
The general rule of thumb states that it is a good idea to consider
refinancing your home when interest rates are approximately two percent
lower than the prevailing interest rate on your current mortgage. This
benchmark took into consideration the costs associated with refinancing
your mortgage such as credit reports, application fees, fees for 'points',
a title search and a sundry of other costs that can create a hefty bill
for refinancing.
In today's market; however, the so called 2% rule may no longer be as
effective at gauging whether now is a good time for you to consider
refinancing. Currently, interest rates have reached a low point that
have not been seen in many, many years. In addition, the balances for
consumer credit have escalated considerably. As a result, it could
actually make more sense for your refinance even if your mortgage is
less than 2% higher in terms of interest rates than the current rates.
The main areas to focus on when determining whether now is a good time
for you to refinance is to consider how much you could save each month
by refinancing, how much it would cost you to refinance and how long it
would be before you could recover the cost of refinancing.
Let's say you have a $200,000 fixed rate mortgage with a 7% interest
rate. With principal and interest, you would be paying about $1,330 per
month. If you could obtain that same mortgage at a rate that was just
one percent smaller, your mortgage payments would drop to $1199 per
month. That is a savings of $131 per month.
Now, let us say that you were able to obtain the new loan without
purchasing any points and your closing costs amounted to $2,500. It
would take a little over a year and a half to recover the cost of
refinancing.
You should also take into consideration whether you could benefit from
switching from a fixed rate mortgage to an adjustable rate mortgage. In
most cases this is not a good option because you run the risk of
changing from a solid fixed rate mortgage to an interest rate that could
fluctuate. If; however, you are thinking of selling your home in the
next couple of years, the opportunity to take advantage of the initial
lower rates that typically come with adjustable rate mortgages can be
quite advantageous.
Many homeowners also consider the possibility of refinancing from an
adjustable rate mortgage to a fixed rate mortgage. The main attraction
here is going from a mortgage that can fluctuate to one that is locked
in. Typically, this is a good option for most homeowners because they
can eliminate the worry that their mortgage payments may rise over time.
In some cases; however, it may not be a good idea. For example, if you
think you might be moving in a few years, you may find that it really is
not advantageous to refinance out of your adjustable rate mortgage
because you may not have a chance to recoup the cost of the refinance.
With any refinancing strategy; however, you must make sure you take into
consideration all of the possible caveats. For example, it is not
uncommon to find that a lender is willing to refinance you mortgage with
no out of pocket expenses. Keep in mind that this typically does not
mean that you will not have to pay for your refinance. Generally, it
just means that the costs of refinancing will be added back into the
mortgage. As a result, you will certainly pay for the cost of
refinancing your mortgage and you will also pay interest for it over the
long term.
Caution should also be exercised when considering refinancing as an
option to pay off consumer debt or pay for college. While refinancing is
certainly an option to fund those situations, it is important to keep in
mind that you will actually be spreading out those payments over a
longer period of time. This means that ultimately you will be paying
more as interest adds up over the long term.
With any refinancing strategy there are going to be certain caveats. The
key is to analyze your situation, current rates and determine whether
refinancing now would make the most sense for you over the long term.
If you think there are great benefits to refinancing your home
to take advantage of the low interest rate,
you can check out
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