The Good, the Bad and the Ugly of Home Refinancing
In the last few years, more and more homeowners have taken advantage of
the opportunity to refinance their mortgages and achieve lower interest
rates as well as lower mortgage payments. When considering home refinancing
it is important to recognize that while there are numerous advantages
there are also possible pitfalls that should be taken into
consideration.
Before you begin the actual refinance process, it is important to keep
in mind that you should fully understand the terms of your existing
mortgage. Much of whether refinancing now is a good opportunity or not
hinges on the terms of that mortgage. If you are not sure whether your
mortgage is adjustable or fixed and whether there are any penalties
associated with terminating the loan early, it is imperative to find out
before you begin refinancing.
You should also understand the basics of refinancing. While it is true
that refinancing will allow you to often achieve a lower interest rate
there are ‘catches’ to every situation that might mean now is not the
right time for you to refinance and reap the most benefits. In addition,
remember that refinancing costs money. Just as there were fees
associated with your existing mortgage there will be fees for
refinancing. While there are innumerable lenders who take pride in
advertising that you pay no out of pocket expenses when you refinance
with them, this is usually not the case. You may not pay the fees out of
your pocket at the time you refinance, but you will pay them. They are
typically added back into your mortgage. This means that you will be
paying for the cost of refinancing your mortgage each and every month
that you pay your mortgage. In addition, interest will be added to that
cost just as it is to the principle of your loan amount. Over the long
term, it could be more beneficial to simply pony up the cost of the
refinance. After all, it is cheaper to pay $3,000 up front than to
finance $3,000 over a period of 30 years at a 6% interest rate. Under
those terms, you would be paying almost $3,500 just to finance those
$3,000 in refinance costs; bumping your total cost of refinancing to
more than $6,000.
Take into consideration how long it will take you to break even when you
refinance. If you will be saving $100 every month by refinancing but it
costs you $2000 to refinance, then it will take you almost two years to
break even. It is great only if you plan to stay in your home longer
than. Otherwise, it would really not make sense for you to refinance at
the current time.
Also make sure that you research all of the mortgage options available
to you. Not all mortgages are the same. The worse mistake you can make
is to choose a mortgage based on the annual percentage rate. You should
also take into consideration the term of the mortgage, whether the
interest rate is variable and whether there are any points, discount
fees or origination fees charged when you close the mortgage.
Typically it is only advantageous to change from a fixed rate to an
adjustable rate mortgage when you will not be in the home for very long
and you will be able to take advantage of the initial lower interest
rates of the adjustable mortgage. With that in mind; however, you must
also consider the break even point. If it takes you two years to break
even on the new mortgage and you plan to move in two years, you really
have not gained much by switching from a fixed rate mortgage to a lower
rate mortgage unless you think you can make money on the sale of the
home to deflect the cost of the refinance.
Shopping around for a new mortgage lender can provide some advantages;
however, you may also find that your existing lender may make it easier
as well as less expensive to refinance. To determine which lender is
able to offer you the best deal by conducting a thorough cost
assessment.
In either case, make sure you read the entire new mortgage contract
before you sign it. Do not allow yourself to be rushed and if you find
that you have questions do not be afraid to stop the process and get the
answers you need before you proceed.
Ideally, you should only refinance when you determine that over the long
term, the savings you would earn by refinancing would be more than the
initial expenses of refinancing. If you think there are great benefits to refinancing your home
to take advantage of the low interest rate,
you can get custom refinancing rate quotes from
.
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