Are You Wondering If It Makes Sense To Refinance Your Home Mortgage At This Time?
There are many reasons why people consider refinancing their home, but the most common one is when interest rates drop or even fluctuate a bit. The general rule of thumb is that you shouldn’t refinance unless the new interest rate is at least two percentage points lower. It really depends on many factors, including your tax bracket, the length of time you plan to stay in your home, and the additional costs you must pay for the refinancing.
As an example, if you have locked in your mortgage at an interest rate that is now 2% or more than what the current market is presently offering, then it would be a good idea to consider refinancing your mortgage. You will have to pay a penalty though, which will be based on the remaining balance of your borrowing term, and by when your loan was originally taken out or renewed. Never the less, in some cases it is worth paying that penalty to enable you to save money in the long term.
It is important, first of all, to determine whether the amount you save on the interest payments will be substantially more than the amount of fees payable during refinancing.
Possible reasons for refinancing…
- Maybe you need extra cash to pay off credit cards or other loans - If you have enough home equity, you can borrow more than the current loan balance. Then with the extra cash, you can pay off high interest debts such as credit card balances etc.
- You want to pay off your mortgage quicker – By reducing the loan term you can shorten the length of your mortgage. Your monthly payments will go up, but you will be able to save more in the overall interest payment allowing you to be debt free in a shorter period of time.
- You want to save on mortgage payments – When you refinance at a lower rate, your monthly payments will be reduced.
- Possibly you have two loans that you want to consolidate into one – If your house has appreciated enough in value and you now have enough equity in your home, it is possible then that you could consolidate a first and second mortgage and refinance into a single first mortgage. The resulting monthly payment on the new loan is likely to be lower than the combined payments of the other two.
- If the current mortgage rates are low -If you get an interest rate that is at least 2% lower than that on your current loan rate. Then in that case the interest savings that you would save each month would help you cover the costs you’ve paid to finance the new loan, provided you stay in the property for a certain period of time (called a break-even period).
- If you have built up enough equity in your home - It could be feasible to go for a refinance when you have built up at least 10% equity in your home.
- When you have had no late payment for the past 12 months - Most lenders prefer this before you switch over to a new loan.
- You have made sure your credit report has no negative items on it – You can access your credit report from the credit bureaus and review it. It is important that you have addressed and resolved any negative items (late payments, collections etc) and have had them removed from the report. Otherwise, you won’t get a low rate and may not even qualify.
- If you only have a few years left on the current loan - If this is the case, it’s no use refinancing with a long term loan. You may need extra cash right now, but with a long term loan, you’ll end up paying more for the entire loan term.
- When your property value has depreciated - If your property value reduces and you refinance up to 80% of the reappraised value, your original mortgage amount may be higher than this amount. In that case, the new loan would not be sufficient enough to help you pay down the existing one.
- If you have used up enough equity - Refinancing may not be that useful if you have already used up 90% or more of your home value in taking out a mortgage or any home equity loan. In this case, you won’t be able to get the best rates available on the market.
- When you have been paying off the first mortgage for a long time – For example, if you have been making payments on a long term loan, like a 30 year mortgage for the past 10 to 20 years, then refinancing to another 30 year loan will not be a good option as it may increase your overall payment.
So to sum up, refinancing a home mortgage will make sense if you are into it for the right reasons and at the right time. You need to decide whether you’d go for a simple refinance or take out extra cash too. And in case you’d like to check out what rates and terms are available, you may request a mortgage refinance quote from your bank or community lenders and brokers. These are usually free and will give you all the facts you need to make the right decision.
Refinance Right - Mortgage Refinance Faq and Advice
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