Home Mortgage Refinancing - A Good Idea?
By Steve Gillman - 2007
Home mortgage refinancing is a tricky because it involves
making a lot of educated guesses. Are refinance rates likely
to go lower? Are you likely to stay in the home for enough years
to make the refinancing worthwhile? How do you figure out what
the points mean in terms of your total savings? Let's start with
a look at some reasons you might consider refinancing.
Home Mortgage Refinancing - Reasons
1. To lower your interest costs.
2. To reduce the length of your loan.
3. To lower your payments.
4. To consolidate your debts.
5. To tap into you equity.
6. To get rid of a variable rate loan in favor of a fixed
rate.
If you want to save on interest costs, it seems natural to
think that you'll do just that with a lower interest rate. Often
this will be true, but carefully consider the costs of the loan,
including any fees and points that you'll pay. How many months
will it take to save enough in interest charges to pay for these?
If it takes three years, for example, before you really start
saving money, be sure you plan to be in the home for that long.
You may want to refinance to get the home paid off more quickly.
Perhaps you have 25 years left on your mortgage loan, but you
like the idea of a new 15-year loan. Should you do it? That depends.
If the interest rate is lower on the new loan, it might be a
good idea. If not, you could just start paying extra on the loan
you have (if there are no prepayment penalties). That accomplishes
the same thing, and you keep the low rate you have while avoiding
loan fees.
If you want to lower your payments on your home mortgage,
refinancing to either a lower interest rate or a longer term
might make sense. Of course, if you are paying for a longer time,
you'll probably pay much more in interest - even at a lower rate.
Be sure that you have a real need for lower payments.
Consolidating debts is often one of the worst reasons to refinance
your home. You effectively take short-term debts and turn them
into long-term debts. Even at a lower interest rate you will
generally pay far more in interest due to the lengthening of
the payoff. However, there is a way that this can make sense.
Get a new lower-interest rate loan on the home, roll your other
debts into that, and then pay extra for a couple years - effectively
paying those higher-interest-rate debts off in less time at a
lower rate.
Bad Credit Home Loans - Keep in mind that your interest rate
on a home loan will be higher if you have bad credit, although
it might still be much lower than the interest you pay on credit
cards.
If you are refinancing to tap into your equity, do the math.
Suppose you need $10,000 for a child's college tuition, for example.
If refinancing can be done at a similar interest rate to the
one you have, that's fine, but what if the current rates are
2% higher than what you have? On a $200,000 mortgage, that could
mean paying $60,000 extra over 30 years. It may be better to
pay high interest on a personal loan of $10,000, because you'll
pay it off much sooner and won't have to pay higher interest
on your entire mortgage balance.
A fixed rate always feels more secure than a variable rate,
but it may not always be a good reason for refinancing your home
mortgage. It is all about those guesses you have to make. You
might be right in guessing that interest rates are headed higher,
and you might be able to lock in a fixed rate that is close to
what your current variable rate is. But if you will be moving
in the next few years, any potential savings could be lost to
the new loan fees and points.
Finally, before you sign any new home financing documents
or mortgage contracts, be sure you understand everything. If
you aren't sure about it, ask a lawyer to review it.
Related Page:
Glossary of Financing
Terms.
Explains most common words and terms related to financing.
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