Mortgage Refinancing
Your mortgage may have a 30-year term, but not many homeowners stay with the same loan for that long. In fact, the average American refinances his or her mortgage every four years, according to the Mortgage Bankers Association. That’s because paying off your present mortgage and taking out a new one can mean big savings over several years.
Why refinance?
Here are some reasons to consider mortgage refinancing:
Today’s interest rates are historically low. If you took out a fixed-rate mortgage several years ago, chances are interest rates have since dropped, which means refinancing may lower your payments considerably. A $150,000.00 mortgage with a 30-year term and a rate of 8%, for example, carries a monthly payment of $1,100.00. The same mortgage at 6% will have a payment of less than $900.00 a month
To switch to a fixed rate or an adjustable rate mortgage. Adjustable-rate mortgages (ARMs) offer lower interest rates initially; with both the rate and payment set to increase after a set period of time. If rates are on the rise, you might consider locking in at a fixed rate and a consistent monthly payment. On the other hand, if you want to reduce your monthly payments and are comfortable with the interest rate changes of an ARM, it could save you money to refinance to an ARM.
To build equity in your home. If a recent change in your financial situation has made it possible for you increase your monthly payments, you might want to refinance your mortgage with a shorter term. The higher payments will enable you to pay off your home more quickly and to save substantially on long-term interest charges.
To use the equity in your home to enable you to take a lump sum (cash out) to build up savings reserves, reduce debt or fund a specific project.
Is mortgage refinancing right for you?
To determine whether refinancing makes financial sense for you, consider these issues:
How long you plan to be in your home? If you expect to move in a year or two, you may never realize the potential savings you’d get from refinancing. As a rule of thumb, the longer you plan to stay in your current home, the more sense it makes to refinance.
Is there a prepayment penalty on your current mortgage? Many mortgages carry a penalty if you pay them off early. The amount varies, but it is usually a small percentage of the outstanding balance, or several months’ worth of interest payments.
The break-even point
In the end, deciding whether the cost of mortgage refinancing is worth it comes down to a simple question: “How long will it take before I start to save money?"