If you have never done it, mortgage refinancing can seem complicated. But when you put it simply, the process is easy to understand. When you refinance your home, you are essentially replacing your current mortgage with a new mortgage. In doing so, you use proceeds (or some of them) from the new loan to pay off the balance of the existing mortgage. If the interest rate is lower than when you initially purchased your home, you may be able to lower your monthly payment. Plus, in some cases, mortgage refinancing also lets you “cash out” some of the equity you have built up in your home. This allows you to use the equity for improvements or other expenses without having to sell your home.
Here’s an example of how mortgage refinancing works: When Sarah purchased her home a year ago, she financed it with a 30-year fixed rate loan. At the time, she signed up to pay a 7.0% interest rate, but later this year, the rate fell to 6.5%. While a savings of 0.5% might not seem significant, refinancing at that rate would lower her payment by about $600 per year on the $150,000 loan.
Before you can decide if mortgage refinancing makes sense, you have to compare the savings to the costs of refinancing. In the example above, if you had to pay $3,000 (roughly 2% of the total loan) to refinance then it would take 5 years ($3000 / $600 = 5) to cover the cost of refinancing.
More Considerations
When you start to consider mortgage refinancing for your home, there are several important factors to keep in mind. Though interest rate seems like the most important aspect of mortgage refinancing, it is not the only thing that will affect your payment. If you are considering mortgage refinancing, consider the following:
1. The term of your mortgage. Oftentimes, refinancing your home implies extending the term of your mortgage. For example, if you have paid five years of a 25-year loan, you might need to be open to extending your total payments another five years if you select a new 30-year loan.
2. Your current credit rating. If your credit has deteriorated since you purchased your home, you may have trouble qualifying for a new mortgage at a better rate. The rules and guidelines for obtaining a mortgage are becoming more strict; without good credit, it’s more difficult to find a better rate, or qualify at all.
3. You future plans. For those that plan to stay in their homes for an extended period of time, mortgage refinancing can mean significant savings. If, however, you are considering selling your home within one or two years, you may actually lose money because of the closing costs and other fees required to refinance a mortgage. In many cases, it may take several years for the monthly savings to pay back the costs of refinancing.
April 17th, 2009 at 12:49 am
So borrowers who may have qualified for a home mortgage last year, may not now. A consumer looking to refinance a home mortgage will be under the same scrutiny as one applying for a home mortgage for the first time. In many areas of the country, homeowners have lost equity from a drop in values and are struggling to lower their home mortgage payments. That makes refinancing extremely difficult, since banks are now requiring that consumers have higher percentages of equity to qualify.
Some analysts worry that the significant amount of current government spending will cause the interest rates to go up in the next few years, due to inflation.
June 20th, 2009 at 2:06 pm
Other responsible consumers who took on mortgage loans within their means are now grappling with decreasing home values, unemployment and reduced retirement portfolios. The Obama Administration has made it clear that a big part of its new economic stimulus bill will go toward boosting the housing sector.
Although the details of the stimulus bill have not been announced, it is expected that any plan will include assistance for consumers struggling with their mortgage loans and incentives for lending institutions. The Treasury Secretary has said that plans to boost the housing sector must include lowering payments on mortgage loans for those struggling with them. It has long been said that it is more financially beneficial for lending institutions to restructure mortgage loans than to have them go into foreclosure.
August 12th, 2009 at 5:39 pm
Conversely, if you anticipate a decrease in rates in the future, applying for a new adjustable rate mortgage may be a better idea.
Homeowners who find they are unable to make their current mortgage payments may opt for mortgage refinancing as a way to extend the term of the loan and thereby lower their monthly mortgage payments. Although this can help you get through a difficult financial period, you will end up paying more in interest over the course of the loan. In addition, if the interest rates on your new mortgage loan is higher, you could end up paying the loan off longer than you intend on staying on in the home.
When applying for mortgage refinancing, you should consider factors such as how much saving you can expect each month, as well as what refinancing will actually cost you.
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