Should You Refinance a Mortgage Loan?
Should you refinance a mortgage loan? This is a difficult question with no easy answers. In some cases homeowners aren’t even eligible to refinance their loan! But typically this is a process that can save a homeowner literally thousands of dollars over the life of the loan and lower their monthly payment substantially.
This can mean freeing up money in the family’s budget which can be used to pay down debt or to add to a savings account. But this process doesn’t always work for everyone. So how can you know if you should refinance a mortgage loan? Let’s review this process so you can make a better decision for yourself and your family.
First, you do need to qualify in order to refinance a mortgage loan. Just because you got a mortgage before doesn’t mean you’ll qualify now; you may have some new spots on your credit record or might have lost some earnings, or your lender may have tightened their credit requirements.
However, let’s just assume that you do qualify to refinance a mortgage loan and look at some details of the process to see if it would work for you.
To refinance a mortgage loan means to set aside or settle your current mortgage in favor of a new one. This new mortgage should have an interest rate that’s much lower than the one you’re currently paying so that you have a lower monthly payment and will pay less interest over the life of your loan.
However, in order for your lender to recoup some of this money that they’re losing they charge a fee to refinance a mortgage loan. This fee is usually a small percentage of your current loan, such as 2.5% or 3%. You need to read over your current mortgage to find out your prepayment penalty; it might be described as points, which are 1% of your current balance.
When you find out the fees involved to refinance a mortgage loan, you also need to add around $1,500 to this for closing costs, which would include things like an appraisal for the home, a title search, and so on. Then you need to discuss with your lender what new percentage you would be eligible for when you refinance a mortgage loan.
Using that new percentage and your new monthly payment, you then figure if your savings would be worth the fees and costs. For example, if all your fees and costs total $4,000 and you save only $100 per month, that means that it will take almost four years for your savings to offset the cost.
But if you save $200 a month and your costs are only $3,000 that means your savings will offset the costs in only 15 months, or just over a year. In a case like that, you would do well to refinance a mortgage loan since after that the savings will be like profit to you and stays in your own pocket.