Refinancing your current home loan is often very beneficial to you, depending on your financial situation and goals. In this time of
relatively low interest rates, refinancing your mortgage can be a way to lower your monthly payment, eliminate high-interest debts, or take
cash out for home improvements or anything else you may need some money for.
The number one and most beneficial reason that people refinance is simply to save money. If you can refinance your mortgage at a lower interest rate than you are currently paying, the savings can be massive. There are some closing costs involved in refinancing and getting a new mortgage, but most of the time the short-term and long-term savings far surpass the closing costs. Closing costs vary depending on your loan amount, your lending institution, and what documents or procedures are required in your specific case. Closing costs often fall between a couple hundred and a couple thousand dollars. Either way, you're likely to save a lot on monthly payments and on the overall repayment amount when you refinance at a lower rate.
Another very common reason that people refinance their home loan is to consolidate debt. Many people suffer from credit card debt which is carrying some outrageous interest rate, and paying off that debt seems like a hopeless task. When refinancing to consolidate debt, all of your high-interest debt, such as credit cards, is rolled into your new mortgage loan. This takes your high-interest debt and spreads it across the life of a home loan, which makes that monthly amount a lot smaller and easier to pay. In addition, that debt is accruing a much lower interest rate. When refinancing for the purpose of debt consolidation, you can also often get a lower interest rate than your current mortgage has, so you are saving money there as well.
Some people refinance if their original mortgage was structured with a low initial payment and a large balloon payment at the end, or perhaps they started off with an adjustable ARM and would like to get into a fixed mortgage or vice-versa. Many borrowers do not have the cash resources to pay off the large final amount on a balloon mortgage, so will often refinance the mortgage at some point and eliminate that overwhelming final payment so it can be paid off more gradually over the life of the loan. Similarly, some do not want to risk their interest rate climbing if they have an ARM, so they will switch to a fixed rate loan.
The main downfall to refinancing your mortgage loan is the new mortgage fees and closing costs. The new mortgage may require a fresh appraisal of your home. It may call for a recent property inspection or title search. The lending institution itself is likely to charge processing fees and clerical costs, and all of this is up to the borrower to pay up front.
As it is usually quite beneficial to refinance your mortgage, it is fairly simple to calculate whether refinancing is worth it to you. You need to find out the total amount that you will pay for bank fees, appraisals, closing costs, or any other cost incurred because you are wishing to refinance. Then figure out how much you will save each month by refinancing. Figure out how long it will take for those closing expenses to break-even. To do this, divide your total new-mortgage costs by the amount that you will save each month. The result will be how many months it will take before you break-even. If you plan to keep your house for longer than that number of months, then refinancing is likely a good idea. For instance, if loan fees and closing costs add up to one thousand dollars, and you are going to save 100 dollars each month by refinancing, it will take 10 months before you break-even. After the ten month mark, you are truly saving 100 dollars each month.
The number one and most beneficial reason that people refinance is simply to save money. If you can refinance your mortgage at a lower interest rate than you are currently paying, the savings can be massive. There are some closing costs involved in refinancing and getting a new mortgage, but most of the time the short-term and long-term savings far surpass the closing costs. Closing costs vary depending on your loan amount, your lending institution, and what documents or procedures are required in your specific case. Closing costs often fall between a couple hundred and a couple thousand dollars. Either way, you're likely to save a lot on monthly payments and on the overall repayment amount when you refinance at a lower rate.
Another very common reason that people refinance their home loan is to consolidate debt. Many people suffer from credit card debt which is carrying some outrageous interest rate, and paying off that debt seems like a hopeless task. When refinancing to consolidate debt, all of your high-interest debt, such as credit cards, is rolled into your new mortgage loan. This takes your high-interest debt and spreads it across the life of a home loan, which makes that monthly amount a lot smaller and easier to pay. In addition, that debt is accruing a much lower interest rate. When refinancing for the purpose of debt consolidation, you can also often get a lower interest rate than your current mortgage has, so you are saving money there as well.
Some people refinance if their original mortgage was structured with a low initial payment and a large balloon payment at the end, or perhaps they started off with an adjustable ARM and would like to get into a fixed mortgage or vice-versa. Many borrowers do not have the cash resources to pay off the large final amount on a balloon mortgage, so will often refinance the mortgage at some point and eliminate that overwhelming final payment so it can be paid off more gradually over the life of the loan. Similarly, some do not want to risk their interest rate climbing if they have an ARM, so they will switch to a fixed rate loan.
The main downfall to refinancing your mortgage loan is the new mortgage fees and closing costs. The new mortgage may require a fresh appraisal of your home. It may call for a recent property inspection or title search. The lending institution itself is likely to charge processing fees and clerical costs, and all of this is up to the borrower to pay up front.
As it is usually quite beneficial to refinance your mortgage, it is fairly simple to calculate whether refinancing is worth it to you. You need to find out the total amount that you will pay for bank fees, appraisals, closing costs, or any other cost incurred because you are wishing to refinance. Then figure out how much you will save each month by refinancing. Figure out how long it will take for those closing expenses to break-even. To do this, divide your total new-mortgage costs by the amount that you will save each month. The result will be how many months it will take before you break-even. If you plan to keep your house for longer than that number of months, then refinancing is likely a good idea. For instance, if loan fees and closing costs add up to one thousand dollars, and you are going to save 100 dollars each month by refinancing, it will take 10 months before you break-even. After the ten month mark, you are truly saving 100 dollars each month.
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