Before You Refinance Your Home Consider This?
Before you refinance your home, it is import to consider all your options. First of all, ask yourself, Will it really save me money to refinance? If you determine that it will, you then must decide what type of new loan is best for you and your unique situation.
In order to make money when you refinance, you must first consider the "break-even" period. This is the period of time that it takes for the savings on interest to cover the cost of refinancing.
How long will it take you to break even? That depends largely on the difference between the interest rate on the new loan versus the old loan. The smaller the difference, the more time it will take to break even.
Your lender will most likely tell you how long you will have to stay in your house to break even, but beware! The break-even period is NOT the cost of the new loan divided by the reduction in your monthly mortgage payments.
This equation is misleading to the customer, as it does not factor in the length of either loan. If you refinance from a 30 year loan to a 15 year loan, your break-even period could be much shorter than the number of months you will get from plugging numbers into the equation.
But if your refinance from a 15 to a 30 year loan, or even if you keep the same term, this equation could lead you to think that you will break even in a very short time, when in fact your break-even period could be much, much longer.
What type of refinance mortgage loan is best for your unique situation? Often, homeowners who have decided to refinance are tempted by the commercials advertising "no-cost" refinance loans. Can you really refinance your mortgage loan for free?
The answer is yes, but be careful. While there are true no-cost loans available from credible lenders, there are also dishonest lenders who can take advantage of you if you do not know your stuff. A true no cost loan means that the lender pays all the costs and fees on your behalf, does not charge you any lender or broker fees, all without increasing the final loan amount. Dishonest lenders include their fees within the loan, keeping them hidden, thereby increasing your monthly payments, which could actually cost you more money than paying the fees up-front.
Another important decision to make when you refinance is, Should I choose a fixed or adjustable rate mortgage? If you currently have an adjustable rate mortgage, or ARM, then refinancing to lock in a low interest rate can be very advantageous to you. If, however, you do not intend to stay in your home for more than a few more years, and your rate will not adjust for another couple of years, then refinancing from an ARM to an FRM could cost you much more than it saves.
When you decide to refinance your mortgage, it is important to consider all your options. It is also important to have a thorough understanding of your current situation, so you can compare loan offers and select the best one for you. Refinancing should put you closer to your long-term financial goals. Something that looks like a good deal in the short term may become a decision you will regret later on. Do your research, know your options, and you will be happy to sign on the dotted line.