Mortgage Refinancing Basics
Your mortgage may have a 30year 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. Thats because paying off your present mortgage and taking out a new one can mean big savings over several years. However refinancing comes with a price in the short term so its important to consider both the costs and benefits before making your decision.
Why refinance?
Here are some reasons to consider refinancing your mortgage:
1. To obtain a lower fixed rate. If you took out a fixedrate mortgage several years ago and interest rates have since dropped refinancing may lower your payments considerably. A 150000 mortgage with a 30year term and a rate of 8 percent for example carries a monthly payment of 1100. The same mortgage at 6 percent will have a payment of less than 900 a month.
2. To switch to a fixed rate or an adjustable rate mortgage. Adjustablerate mortgages (ARMs) offer lower interest rates initially but some homeowners find the fluctuations stressful. If rates are on the way up you might consider locking in at a fixed rate and 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.
3. To reduce your monthly payments. Refinancing for a longer term will lower the amount you have to pay each month. You will end up paying more in interest charges over the life of your loan but if youre having difficulty making your current payments this strategy could provide some relief.
4. To turn home equity into cash. You may want to take out a new mortgage with a larger principal in order to turn some of your home equity into cash for a major expense. This is called cashout refinancing. The advantage of taking out a loan secured by your home is that you can get a lower rate of interest than you can with an unsecured loan or credit card. However if the interest rate offered for your refinanced mortgage is higher than your current rate a home equity loan or line of credit might be a better choice.
Is refinancing right for you?
If youre refinancing in order to pay less interest you wont usually see the savings right away. Thats because lenders typically charge fees when you take out a new mortgage and you may also have to pay a penalty for getting out of your old one. To determine whether refinancing makes financial sense for you consider these issues:
1. 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 youd 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.
2. The 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.
3. The costs of the new mortgage. When you take out a new loan your lender may charge a number of fees including application appraisal origination and insurance fees plus title search insurance and legal costs that can add up to thousands of dollars. Lenders may also charge discount points which are paid upfront to secure a lower interest rate. As a guideline expect fees to eat up any potential savings unless your new interest rate is at least a half a percentage point lower than your current one.
To learn more about mortgage refinancing and when it makes sense visit http://www.lendingtree.com/cec/yourhome/yourmortgage/mortgagerefinance.asp
About the writer:
The editorial staff at LendingTree is committed to helping consumers become smarter borrowers. Visit http://www.lendingtree.com/cec for more information and tips on buying selling and financing a home. Copyright 19982006 LendingTree LLC.
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