If you are considering refinancing your home mortgage, there are many factors you should consider before making your choice, especially if you are refinancing to save money on your current loan. Your savings will be dependent on the number of years left on your current loan and the amount that you intend to refinance on your home.
Reasons for refinancing include consolidating high interest loans like credit cards, liquidating the equity, or lowering monthly payments with a more favorable interest rate. While refinancing for debt consolidation may, in fact, save you a considerable amount of money, refinancing for a lower monthly payment can really cost you money, particularly if you intend to remain in your home for more than 15 years. There are more costs to consider than monthly interest rates when refinancing.
The amount of time left to pay on your current mortgage must be carefully considered before refinancing. If you have paid on your mortgage for more than half it’s original term, refinancing could really cost you money. If you are less than one third of the term into your current loan, than refinancing for a lower interest rate can result in savings over the life of the loan.
Always review the terms of any loan you are considering. If you don’t know the terms, seek help from an attorney or accountant that you trust. If you find, after reviewing all the aspects of the loan including the closing costs, the monthly equity increase and the point at which you really start realize savings, that the amount of savings is not significant, than you are better off remaining with your current mortgage. It’s necessary to compare the amount of the principal and monthly payments of the new loan and your current loan based on the amount of time left on the loan.
Your FICO score will have an impact on your ability to refinance. If the score is low, you may be unable to find a loan with a low interest rate. If it is high, you should be able to get the lowest possible interest rate. Before removing equity from your home, consider your debt to income ratio. Also consider the current value of your home. You don’t want to owe more on your loan than your home is worth.
A point that many people fail to consider when refinancing is that the fees and closing costs are part of the cost of the loan. The origination fee for the lender and the closing costs for the new loan can add thousands of dollars in costs to the new loan. This may offset any savings you realize with a lower interest rate.
Thankfully, under the Obama administration, this has been scrapped BUT only for those who qualify e.g. Losing their jobs because rescission, hospitalization, or other problems that warrants the scrapping of the fee. If you can prove this, you can get government help to get a refinance. If you qualify, you can delight in an affordable refinance but not until then.
Until you have reviewed your financial situation and the requirements for a refinance, you can assess your chances for paying off a refinance successfully. But if you are dealing with an Adjustable Rate Mortgage and want to switch to a lower Fixed Rate Mortgage, lock into the lowest rate now after considering everything that goes into a refinance. If you’ll break even soon enough and pay lower rates which you can comfortably afford, then by all means, check this option.