Should I Refinance

Should I Refinance

Refinancing a home mortgage can bring substantial benefits, but many homeowners are still debating the question of should I refinance?

Here are the most common reasons that customers take advantage of a refinance loan.

1. I want lower interest rates. In the past five years, interest rates have dropped nearly 2.5%, with a 0.5% drop occurring in the last year alone. These rate differences may not seem like much, but they can save homeowners a significant amount of cash over the life of the mortgage. Unfortunately the rate decline will not last much longer. Homeowners who are looking for lower interest rates are encouraged to lock in the better deal while it is still available.



2. I want to pay less over the life of the loan. Lower interest rates mean more money going to the principal balance each month instead of to loan interest. A person carrying a $200,000 mortgage at 4.75% may save up to $167,000 in interest charges by switching to a 30-year fixed loan at 4.25%.



3. I want smaller monthly payments. By restructuring an existing loan over a longer repayment period with a lower interest rate, homeowners can slash their monthly payments. The money saved can be put toward other bills or can be used to pay down the mortgage loan faster. For example, a family with a $200,000 home loan at 6.75% can drop their payments by up to $700 per month just by switching to a 30-year loan with lower rates. Reducing monthly payments can save families from financial distress or foreclosure.

Refinance Costs

When asking, should I refinance consumers should weigh the advantages of a refinance loan with the costs of taking out a new mortgage. Because homeowners are entering into a new contract, they can expect to pay closing costs, taxes, home insurance premiums, and home ownership association dues at the time of closing. Some loans also have prepayment penalties, which must be paid to escape a contract early. Certain loan products permit customers to lump these fees into the new loan, while others require a separate payment before the refinance can be completed.

In particular, customers who want to decrease their monthly payments should consider how many months it will take their monthly savings to pay off the new closing costs. As an example, a person paying $3,000 in closing costs and saving $100 per month due to a refinance would take 30 months to recoup the additional expenses.

Length of Homeownership

Another key issue in deciding whether to refinance is understanding how long the family wants to stay in the current home. Refinancing a home loan now and then moving in a few years does not retain as many benefits as refinancing a home loan now and then keeping the home for ten, twenty, or thirty years.

Current Balance

When making an informed decision about refinancing, a final issue that must be considered is the current loan balance and home equity. A customer who owes more than a property is worth will have difficulty finding a new lender. Certain government programs may help the situation. A knowledgeable mortgage broker can discuss options and find a plan that works.

What Do I Do Now?

If you have answered should I refinance with a resounding yes, the next step is to apply for a new mortgage loan.



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