Refinancing: How and When to Do It
Deciding to refinance your house is a big step and will depend on a number of factors. You need to ask yourself the following questions: How long have I owned my home? Will I continue being the homeowner, or am I planning to transfer ownership rights to someone else? Has my financing capability changed? Am I still qualified for a new mortgage loan? Do I have enough savings to go through refinancing? Is there a penalty for paying off my current loan before the term's end?
Reasons For Refinancing
A common reason for refinancing is that people want to lower the amount they pay off for their monthly mortgage. If the interest rates in the market have decreased significantly since the time of the original loan, then you can lower your mortgage payments considerably. However, there are other reasons why refinancing can be appropriate for your situation.
If you have substantial equity on your home, it may be advantageous to you if you go for a "cash-out refi." You can do this by obtaining a new mortgage based on your home's present value, paying off the existing loan, and ultimately getting the extra cash for yourself.
Refinancing can also allow you to lessen the length of time you will be making mortgage payments. You can swap your 25-year mortgage for a 15-year one or any other duration that best fits your situation. If the current interest rates are low enough, you may even get a new loan that will have the same monthly payments even with the shorter mortgage period.
One other reason you could go for refinancing is that you can transfer from an adjustable-rate mortgage (ARM) (interest rate that is dependent on market conditions) to a fixed-rate loan. Having a fixed-rate mortgage gives you the security of paying for the same amount, regardless of what happens to the future rates. You can also opt to do this reversely. If the ARM rate is quite low, then it might be best to make the switch from the fixed-rate loan.
When is the Best Time to Refinance?
So, when is the best time to refinance? The general rule used to be that you should only refinance when the current market rates are at least two percentage points lower than what you are paying. But with the popularity of "no-cost" refinancing, the aforementioned scenario is no longer the benchmark. By opting for this plan, you won't need to shell out money from your own pocket once you close the new loan. The lender can either bundle the fees with your new mortgage loan or charge a higher interest rate than if you have paid the lender's costs right away.
Remember: refinancing can only make a real difference if you actually save money from doing it. If you have a new loan wherein you can save $100 a month, but there is a $2,500 upfront cost to do it, then it would be 25 months before you can actually have any savings. Also, it isn't advisable to refinance your home if you are planning to move out of it soon. Refinancing can only work for you if you think you will be staying in your house for a long time.
Refinancing: How and When to Do It
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