How To Determine If Refinancing Is Right For You
Are you thinking of refinancing your mortgage
? Mortgage refinance loans are often touted as a great way to lower your monthly mortgage payment or decrease the overall amount that youll pay over the life of your current mortgage. There are times when it makes a lot of sense to refinance a home mortgage, but its not always the best plan. How do you decide if its the right time to refinance your current home mortgage? These questions and considerations can help make your decision to refinance easier.
Has the prevailing interest rate dropped significantly since you took out your current mortgage?
One of the most common reasons for refinancing a home mortgage is to get a lower interest rate. If the current prevailing mortgage rates are at least one full percentage point lower than the interest rate on your current mortgage, it may be worth considering trading in your mortgage on a refinance. As a general rule of thumb, its only worth refinancing if you can get an interest rate thats lower by at least one percent than your current mortgage. While there are some exceptions, anything less than that means that you wont realize enough savings to offset the costs of the refinance.
Can you qualify for a lower interest rate than your original mortgage?
Of course, even if the prevailing interest rates have stayed the same or increased, YOU may qualify for a lower interest rate than youre currently paying if your circumstances have changed enough to affect your credit score. For instance, you may qualify for a lower interest rate if:
-youve paid regularly on your mortgage for two or more years with no missed or late payments
-youve paid down your outstanding non-mortgage debt considerably
-your salary or income is substantially higher than it was
-youve changed your marital circumstances
Again, if you can lower your current mortgage rate by at least one full percent, its definitely worth considering refinancing your current mortgage.
Is your current monthly mortgage payment unaffordable?
Another reason for refinancing your mortgage is to lower your monthly mortgage payment. There are two ways to do this find a mortgage with a lower interest rate, or find a mortgage with a longer term. Many people who took out adjustable rate mortgages over the past several years may find themselves with monthly payments that are suddenly unaffordable when the interest rates adjust up after an initial low mortgage rate.
If thats the situation in which you find yourself, you may need to stretch your mortgage repayment over more years. Refinancing your loan to stretch out the payments another five to ten years could lower the amount that you have to pay on your loan each month, though it will almost inevitably increase the amount that you pay for your mortgage overall.
Can you afford to pay a higher monthly payment?
While many people refinance in order to decrease their monthly mortgage payment, sometimes it makes sense to pay more on your mortgage each month. If you can refinance into a shorter mortgage, youll pay higher monthly payments, but will have your mortgage paid up sooner. Youll also generally save tens of thousands of dollars over the life of your mortgage money that youll have to invest or spend in other ways.
How much can you save be refinancing into a shorter term mortgage? If youre paying off a $150,000 mortgage at 6.5% for thirty years, youll pay a total of $341,316 over the life of the loan. If you roll that over into a twenty year mortgage at the same interest rate, your total mortgage will cost you $268,406.40 a lifetime savings of $72,910 just for paying an extra $170 a month.
How much will it cost you to pay off your current mortgage early?
When you refinance your mortgage, youre essentially borrowing money to pay off your current mortgage early which may trigger early repayment penalties. Be sure to check the terms of your current mortgage to find out how much it will cost you to pay off your mortgage early. In most cases, the pre-payment penalty will run you the equivalent of one to two monthly payments.
In addition, the new mortgage will likely incur the same closing costs that your original mortgage did, adding to the upfront money that youll need in order to refinance your loan. Before deciding that a mortgage refinance is right for you, do all the math to be sure that it makes financial sense to refinance your mortgage right now.
How long will you be staying in your house?
Because refinancing your mortgage will incur upfront costs, it only makes sense to do it if youll be staying in your home long enough to recoup those costs. To calculate whether it makes sense to refinance your mortgage now, add up all the costs of refinancing, then divide that by the amount youll be saving on your mortgage payment each month.
For instance, if your loan closing costs plus your prepayment penalty totals $4,500 and the refinance lowers your monthly mortgage payment by $105, it will take 43 months for you to offset the refinance costs. If youre planning to sell your home in less than three and a half years, youll actually lose money by refinancing now. For every month over 43 months that you stay in your home, youll be adding to your savings over the life of your mortgage.
Every circumstance is different. If youre considering refinancing your mortgage, take all the circumstances into consideration, and then make the decision thats best for you.
by: loa1234
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