Should You Refinance Your Home Mortgage?
Do you know what it means to refinance your home mortgage? Some people believe it means reworking or rewriting their existing mortgage, but in reality it means setting that mortgage aside and writing up an entirely new home loan.
There are of course costs when a homeowner does this. A mortgage typically has a prepayment penalty, written as points or a percentage of the current loan. There are also fees incurred when you refinance; these are similar or identical to the fees incurred with an original mortgage and include an appraisal, a home inspection, broker fees, processing fees, and so on.
The whole process also might not save that much money for many homeowners, and some may not even qualify! So why bother with a refinance of the home mortgage?
Typically a homeowner will refinance when they’re eligible for a lower interest rate than what they’re currently paying. This can mean more savings over the life of the loan as it will reduce the amount of interest owed and will lower the monthly payment as well.
This savings that you would experience in the long run offsets the fees and costs you pay up front when you go through the refinance process. Anyone considering this process however needs to do some basic math. It’s important to consider the amount of interest you would be saving and the amount of money you would save every month by way of lower payments, and compare this with the amount you need to pay up front when you do refinance.
This is the only way you can decide if this is right for you. As an example, if you save just $100 every month and need to pay $3000 in costs and fees, it would take you 30 months or almost three years just to break even! This might not be the best way for you to go.
On the other hand if you saved $250 every month and your costs and fees were only $2500, it would only take 10 months to break even, which would make a refinance a more viable option.
Of course the money you would save now is only part of the consideration when it comes time to refinance. Some who have adjustable rate mortgages are looking at a future reset that would put that mortgage actually out of the reach of their budget.
Many homeowners have actually faced foreclosure because of this, and a refinance is their only option. That future savings you would experience, or just keeping your mortgage affordable, can mean that this is the best option for you.
Anyone considering a refinance option should make an appointment to speak to their lender. Only your banker can tell you the rate you would qualify for and can advise you on your best options. Of course you need to do your own research and make your own decision in this regard, but your lender can walk you through your entire refinance process from start to finish.
