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Refinancing
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When Should You Refinance
When interest rates start dropping, there is a lot of talk about refinancing. There are many reasons why people refinance their mortgage. You have to determine if refinancing is the best option for you.
Normally people start thinking about refinancing when rates are 1 to 2 points below their current rate. But don’t use the interest rate as the only reason for refinancing. A refinancing requires the same paperwork as an initial loan: application, credit check, title search, appraisal, etc., as well as all the fees. If you’re not planning on staying in the home for a few years it usually does not pay to refinance.
There are many reasons to refinance your mortgage. For most people when they refinance, they use some of the equity they have in the home in the form of cash. The cash out can be used to consolidate debt, make improvements to the home or used for a down payment on another property.
The money can also be used for college or other school expenses, to buy a car, travel or pay off some bills.
When refinancing most people get better terms on the mortgage loan than they had previously. The reduction in percentage points will lower the monthly payment if taken out for the same length of time. If more money can be put toward the mortgage, you can shorten the loan term, pay off the mortgage in fewer years and save thousands of dollars in interest costs.
Weigh these reasons with the disadvantages of refinancing to determine if it is the way for you to go. When you refinance you will incur closing costs and other fees again. Many times these fees are rolled into the loan which increases the payment. If you do not stay in the home for at least three years, these costs will not be recovered by the savings in interest payments.
Do the calculations to see how much you will be saving by refinancing and make an informed decision.