Have you received a mortgage refinancing eligibility notice in the mail? Is your neighbor bragging about being able to refinance their mortgage? Are you considering refinancing your mortgage? In any case, it helps to be aware of the process and to learn about your options. Before you start thinking about the benefits of mortgage refinancing and weighing the costs, it is very important to learn as much as you can about the process and to comprehend it completely.
How does mortgage refinancing work?
Refinancing a mortgage refers to the obtaining of a new loan under new terms for your home. Most people consider their loan hunting days to be over once they have bought their home. However, mortgage refinancing will allow you to pick a loan with a lower interest rate, build equity in your home with a shorter loan period and lower monthly payments. Refinancing will also present you with the option of choosing between fixed-rate mortgages and adjustable-rate mortgages.
Should you do it?
This is an important question that needs to be answered by taking a lot into consideration. For starters, you will need to think about the size of your existing mortgage, the current value of your home, the interest rates and the closing costs along with any important details about the new loan you plan to take out. You can use a mortgage refinance calculator (available online) to help determine a ballpark figure to suit your situation. If you are planning on staying in your home for longer than that time it will take for your monthly savings from the new mortgage to recoup the upfront expenses of financing, then you can definitely go for it!
What are the costs?
When your home was bought, you most likely had to pay closing costs. When you refinance your mortgage, you will have to pay closing costs again in order to replace your old mortgage with the new one. You can expect to pay about 3 – 6% of your principal in the form of refinancing fees and any prepayment penalties that may be incurred. There is the option of obtaining ‘no-fee’ refinance as well. Make sure to steer clear of these as they may have a higher interest to make up for the fees that are cut-off in the beginning.
When is mortgage refinancing not a good idea?
Mortgage refinancing is a great choice but not something that suits everyone and every situation. For starters, you have to be eligible to obtain a new loan. This means that you will have to have a certain equity amount in your home and a good credit score. If you don’t have these, then refinancing is not an option for you. Even if you do qualify, if you have plans to move from your home, then refinancing is not a good idea as you won’t have enough time to recoup the new loan’s upfront charges. You will also need to be able to afford these upfront costs. As mentioned earlier, some lenders may allow you to pay the closing costs as a part of your monthly payments. But this is only going to cancel out your payments and end up costing you more in the long run. In some cases, the original mortgage may carry very high prepayment penalties that may cancel out the potential savings from a refinance.