Know when it's the right time to refinance your home. Refinancing is signing for a new loan to replace your original mortgage and usually done for cost-saving purposes.
Deciding whether or not to refinance your home requires a serious look into various factors. And it also depends on your short-term or long-term goals because refinancing is not all about reducing interest.
Conventional wisdom suggests that you shouldn't enter into the refinancing process unless the market rates are approximately two percent below your original mortgage lock in rate. This difference should yield a "break even" period of about two to three years for most conventional, middle to high end, American mortgages.
Some more innovative re-financers may want to take advantage of one and a half or even one and a quarter percent differences in the refinancing rate -- if the principal of your loan is high, relative to the costs of refinancing, it may be worth it to refinance at one of these lower rates.
Some Things to Remember When Considering Refinancing:
- The decision to refinance should only be made if the long-term savings outweigh the initial expenses. To calculate your break-even point, divide the cost of the refinance by your monthly savings. The resulting figure represents the number of months you will need to stay in the home to make the strategy work.
- Don't select a new mortgage based only on its annual percentage rate.
- Also evaluate the term of the loan, whether the interest rate is fixed or variable, and the relative merits of paying up-front fees in exchange for a lower rate.
- Your current lender already knows you and has your financial information on file, so you may be able to get a better deal that way, instead of going to a new lender.
- To get the best possible refinancing deal, you'll need to shop around, crunch some numbers, and ask a lot of questions.
- Shop around and conduct a detailed cost assessment (with a financial professional, if necessary) to identify which mortgage offers the greatest financial benefits.
- Read the entire contract before signing. Don't let anyone pressure you or rush you to make a hasty decision.
- If refinancing results in lower monthly payments, use those savings to pursue other important goals, such as preparing for retirement and college costs.
Refinancing a mortgage is simply taking out a new mortgage. You will encounter many of the same procedures and the same types of costs the second time around.
If you decide that a refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of a refinancing.
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