Refinancing is an option for people who haven’t been paying on their mortgage loans very long. You have to look at several different factors to determine if you will benefit from a refinance or not. For some lower interest rates may be worth the additional closing costs associated with refinance. However, for others who are close to paying off their mortgage, the new interest rates could extend the term of their loan.
During the first ten years of a 30 year mortgage loan interest accounts for more of the monthly payments than it will after the first ten years. For those that have only been paying on their mortgage for five years, or who plan to sell their home eventually, the lower interest rates can save them money. If interest rates are lower than at the time of the original closing, or your credit score has improved since then and you may qualify for lower interest rates and refinancing could be a good option to lower your monthly payments.
Determine the Savings
The only way to determine if you will truly benefit from a refinance is to calculate the pay back period by taking the closing cost and diving it the overall monthly savings. If it is less than 24 months then it is probably a very good reason to proceed with the home refinance. There are a variety of calculators available on line to help you determine the monthly savings, but you will still need to add in fees, closing costs, and other refinance expenses, such as a new home appraisal.
Refinancing can also open up the option of taking out a different kind of loan. If you currently have an adjustable rate loan (loans that fluctuate during certain terms to match the current interest rates) you may wish to have a more stable monthly payment that doesn’t fluctuate. Refinance would enable you to switch your adjustable rate loan to a fixed rate loan, one that will not change throughout the term. This can be good for people with fixed income, changing income or income that will change within a certain amount of time.
Some people may also choose to refinance with an interest only mortgage. Interest only loans allow you to make payments during a certain time period (such as the first five years) that only cover the interest on the loan
A cash out refinance loan is simply when a new loan being taken out is larger than the balance still owed on the home. This gives the home owner the ability to access the equity that has been built up in their home and apply it to other needs, such as college tuition or home repairs.
By: Bill M.