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It should be noted that there are some costs associated with the process. Refinancing typically costs 3-6% of your current outstanding mortgage principal. This is mostly due to the fact that taking out a new mortgage involves payment of closing costs, and in some situations you may be liable for a prepayment penalty on your existing mortgage. In the long run, however, refinancing at the right time for the right reasons will save you more than getting that second mortgage will cost.
Benefits of Refinancing
For most people, the sole benefit of refinancing is to obtain a mortgage with a lower interest rate and save money on future repayments. If you purchase your home at a time when interest rates are high, refinancing once those rates drop can save you a large chunk of money. However, as noted above it is important to consider the costs when you are deciding whether or not to refinance.
Refinancing can save you thousands of dollars in interest if your second mortgage has a shorter term than the first, even if you do not lock in a lower interest rate on the second mortgage. If, for example, you are six years into a 30 year mortgage, and find that you are able to afford higher mortgage payments, you might consider switching to a 20, 15 or 10 year mortgage. This will not only mean significant savings in the amount of interest you pay, but will also allow you to build up equity in your home more quickly.
Another good reason for refinancing is in situations where you want to exchange some of the equity in your home for cash. However, this does mean that you will be borrowing more money than you currently owe, meaning that you will also be extending the terms of your mortgage. In general, this is only a good idea when you plan to use that cash to add value to your home, either by remodeling or by building onto your property. Refinancing is not a good idea when you plan to use the money to pay off credit card debt, or buy assets that depreciate quickly, such as a new car.
When is Refinancing a Good Idea?
In some situations, refinancing is unlikely to help you pay off your mortgage faster or reduce your monthly mortgage repayments. For example, refinancing is almost never a good idea when your credit rating is worse than it was when you got your original mortgage. In this case, your lower credit score will usually mean you cannot get an interest rate that is favorable enough to lower the cost of the new mortgage enough to make refinancing worthwhile.
In general, refinancing is a good idea when:
You will be living in your home long enough for the costs of refinancing to be recouped by the savings you make on
your new mortgage payments. In most cases this will take five to seven years.
Your new loan is for less than 80% of the current value of your home.
Your new loan balance does not exceed the total amount owing on your existing mortgage.
Your credit rating is equal to or higher than it was when you took out your original mortgage.
If you have an adjustable rate mortgage (ARM), refinancing may be a good option even in situations where some of the above points do not apply. For example, if you financed your home with an ARM when interest rates were low and they now look set to rise over the next few months, refinancing to a fixed rate mortgage may be a good idea. Another good reason to refinance out of an ARM is in a situation where you originally bought your home with the intention of moving within a few years, but have since decided to stay there for the long term. Sticking with the ARM is risky in the long term, and it is often more prudent to switch to a fixed rate mortgage if you plan to keep the property.
The benefits of refinancing also depend on the age of your mortgage. If you are twenty years into a 30 year mortgage, refinancing should be approached with caution. Taking out a new mortgage at this stage will reduce the equity you have in your home if you borrow more than your current outstanding balance, because conventional mortgage repayments are front loaded with interest, and by this stage your repayments are mostly for principals. If you have already paid off more than half your mortgage balance, refinancing will not usually save you money, even if you do lock in a lower interest rate.
Relying on your particular state of affairs, refinancing your mortgage can make a lot of sense. Should the mortgage rate happens to go down, you may well end up saving hundreds or as well thousands of dollars over a time by refinancing. A number of homeowners, on the other hand, do not even understand that refinancing is an option. Should the mortgage rate plummet; here are a few of the tips that you are supposed to follow to refinance your mortgage.
Go through your original mortgage agreement. You might not understand it; however the majority of mortgage agreements comprise a section with reference to refinancing. For the most part mortgages can't be refinanced for in any case a year, moreover there might be penalty fees related with refinancing, reliant on your lender. Earlier than you come to a decision whether refinancing is worth the money, take care that you keep in mind the related fees to nullify your original mortgage.
Do some research on various mortgage lenders for the most excellent rate? There is no rule that declares that you have to refinance with your existing mortgage lender. By and large, that is the easier option; however you can look into other mortgage lenders as well. Contrast lenders based not only on interest rate, but also closing costs, terms, and other parts of the deal. Keep in mind, on the other hand, that a few mortgage lenders charge extra fees to move the mortgage to a different lender.
Be familiar with and make financial arrangements for closing costs, as closing costs can be expensive. As soon as you refinance, you will have to pay off a lot of the closing costs you paid the first time around. Even though a few charges, such as title transfer fees, might not be relevant, you will have to pay for underwriting, document preparation, and other expenses all over again. If you do not have the cash to pay for closing costs upfront, you can at times include them to the entire mortgage, although on the whole, this is a bad idea, given that you will end up negating the money you will save as a result of refinancing.
Ahead of, refinancing your mortgage be aware of the current mortgage refinancing rates. For this, you can get in touch with your current lender or you can search on the internet. You just have to type “mortgage rates” or “refinance mortgage rates” and you will have all the options in front of you. There are now websites dedicated to financial services like mortgage broking and mortgage counseling. You can request for call back from financial experts they can offer free counseling to people who are considering refinancing or are looking at mortgage to buy new home. These websites often have listing of interest rates for different types of mortgage loans, from various lenders. You can compare using free online calculator provided by these websites to decide on the lowest rates and best possible deal overall. These websites are boon for people seeking mortgage and mortgage refinancing.