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Should I Refinance My Home? Five Things to Consider
What Is Home Refinancing, Anyway?
Refinancing a home involves getting a new, secured loan to pay off your original loan: in this case, your home mortgage. Deciding if this is a profitable route for you to take depends on the mathematics. Because refinancing involves additional fees, you should determine if the money you save is greater than the additional fees you will incur for refinancing your home.
If you don't want to do the math yourself, BankRate.com has a great calculator on their website to help you make your home refinancing decision here: "Will You Save By Refinancing?"
The Home Mortgage Crisis
In many parts of the United States, house values are dropping, and many people are losing their houses to foreclosure. In response, the Federal Reserve has cut interest rates significantly, causing a trickle-down effect that has in turn lowered the market interest rates for home mortgages. Many people are now asking themselves: "Is the trouble and time to finance worth it?"
In many cases, the answer is yes. Read on.
#1 Two Ways to Save Money on Interest Rates
Due to the current economic situation, interest rates are in you, the homeowner's, favor! There are two ways you can find better interest rates.
- First, if the market interest rate for home lending is lower now than when you originally bought your house (and it probably is), you should look into refinancing. Interest rates are low, and it makes financial sense to take out a second loan, pay off your high-interest rate mortgage quickly, and then make payments on your new, lower-interest, refinanced loan.
- Second, if you have the funds, you can use a second home mortgage to switch from a traditional 30-year mortgage to a shorter-term mortgage. Not only will you pay off your house more quickly, you will save thousands of dollars in interest rates.
#2 No More Private Mortgage Insurance
Private mortgage insurance is necessary if, when you purchased your house, you didn't have the money to make the minimum 20% down payment. However, if your house has appreciated in value since its purchase (likely, unless you were in an area particularly hard-hit by the mortgage crisis), and you have made regular payments to your mortgage, you might well have paid off the requisite 20%.
Thus, if you refinance, you will save the cost of that Private Mortgage Insurance, saving you potentially thousands of dollars over the years.
#3 Refinance at a Fixed Rate
There could be many reasons why you originally chose an adjustable rate mortgage. Your financial situation could have been more risky, leaving you with few options. Perhaps you were not sure how long you would stay in your current house. Yet whatever the reason, you have the opportunity to lock in lower interest rates if you refinance your home now, and choose the option to switch to a fixed-rate mortgage.
Interest rates probably will not go much lower, and they almost certainly eventually rise significantly, so take the time to have these permanently low rates now.
#4 Points and Payments
Lenders who specialize in refinancing usually require up-front payment for their services. Therefore, you need to figure out before the refinancing if the money paid to the refinancing lender will be worth the money you will save down the line.
The amount you have to pay is a percentage of the total loan amount, and is expressed in "points." One percentage point equals one point. To make things even more complicated, refinancing lenders often offer an extensive range of interest rate options: the lower the interest rate you want the refinancing lender to give you, the more upfront points you must pay.
Again, math is required. Research and determine what works best for you financially. Pay more money now to save even more money in the long-run? Or pay only a couple points to save a little less long-term?
#5 Be Aware of the Different Refinancing Types
Cash-Out Refinancing is a refinancing type of which you should be wary, unless you absolutely need it. Essentially, you take out a larger loan than your current mortgage, and you can keep the cash difference. You should only use this if you desperately need the cash to cover unexpected expenses. Cash-out refinancing is not a magic solution, and does not lower your interest rate or shorten the length of your mortgage term.
This article at DoItYourself.com discusses some more of the dangers of cash-out refinancing.
No Closing Cost Refinancing is when homeowners have very few up front costs they must pay to get their home mortgage refinanced. However, if this sounds too good to be true, it sometimes is. If you are not careful, you will still pay more than you should, or you may even lose money. This happens through what is called a yield spread premium, which is extra money that refinancing lenders receive for giving you into a higher interest rate than you might otherwise qualify for. Inquire with your broker about their policies regarding yield spread premiums, and be educated about your refinancing options.
Websites You May Find Useful
- MortgageLoan.com's Refinancing Information
A general synopsis of what exactly home financing is.
- Wikipedia.org Refinancing Article
Brief but informative encyclopedia article about home refinancing.
- The Dangers of Mortgage Refinancing
Helpful guide of how you can be tripped up if you are not careful about mortgage refinancing.
- Housing's new day may very well begin with the FHA
Extensive information about the use of the Federal Housing Administration.
- What is the best way to measure the costs and gains from refinancing so I can be sure I will come ou
A good article if you need further help about determining whether or not you should refinance your home.
- Tips for refinancing your mortgage
A step-by-step guide to home refinancing if you need more guidance.