When should you refinance your mortgage?
If you are considering refinancing your home loan, you'll find that the process reminds you of what you went through in obtaining the original mortgage. That's because, in reality, refinancing a mortgage is simply taking out a new mortgage. You will encounter many of the same procedures, and the same types of costs, the second time around. Refinancing home loans can be worthwhile, but it does not make good financial sense for everyone. A general rule of thumb is that refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings. There are other considerations, too, such as how long you plan to stay in the house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. (Depending on your loan amount and the particular circumstances, however, you might choose to refinance home loan that is only 1.5 percentage points higher than the current rate. You may even find you could recoup the refinancing costs in a shorter time.) want to get out of a high interest rate loan to take advantage of lower rates. This is a good idea only if they intend to stay in the house long enough to make the additional fees worthwhile. have an adjustable-rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan. want to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM they currently have. want to build up equity more quickly by converting to a loan with a shorter term. want to draw on the equity built up in their house to get cash for a major purchase or for their children's education. If you decide that refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of a refinancing. I am a Sr. Loan Officer. I tend to often thoroughly question my clients to find what best benefits them and if it is even worth it for them. Many brokers will try to find a way to get it done just to get a loan. But I believe in honesty and now may not be a right time but further down the road may be a right time. Mainly I always ask how long do you plan to stay in the home? Some people refinance their loans every 5 years, some even every year. If you refinance so often why are you jumping into 30-year loans? If you plan to sell your home within the next few years, why get a long-term loan? There are many hybrids arms and other types of loans such as interest only that could be of a much greater benefit. There are arms with fixed terms as well, such as 2/28’s, which amortize over 30 years and are fixed for the first two years; they offer a much lower rate than a conventional 30-year fixed. Another aspect is what do you want to accomplish in your refinance? Do you want to pay off debt, do you want a new car, do you want to lower the rate? Consolidating debt through a refi can be very beneficial, for one at the end of the year after making minimum payments how much of that do you write off on your taxes? The answer is none; on the other hand your mortgage is tax deductible. Mainly you have to weigh out the benefits and see if the cost vs. benefits is worth it. If you are going to lower a 6.5% rate to a 6.25% rate then obviously it is not worth it. Rather than simply refinancing, why not get set up to pay less in interest and more in principle, and actually earn interest off your principle, without changing your monthly payment? This will allow you to pay off your mortgage in less than half the time, and after 30 years you can have over $1 million saved for retirement. This is done through a Cash Flow account.