You hear lots of talk about refinancing, this article will explain refinancing a mortgage, what it is, and if it’s best for you.
What Is It?
When you first signed your mortgage papers, you agreed to certain terms and conditions associated with the loan. Included in those terms were the additional fee’s the bank was going to charge you to borrow the money. That’s the interest rate. The interest rate determined when you first got your mortgage was based on several factors. Your credit score, the value of the property, and the amount of money you were borrowing were all calculated in that original term.
Over time, these things can change. Your credit score can increase, the value of your home can change, etc. A refinance is basically a negotiation where the original terms will be changed. Refinancing your mortgage can save you money.
Things To Consider
Even though refinancing can save you money, there are also costs associated with it. If your mortgage has an early payment penalty, which many of them do, it may not be feasible to refinance. Since refinancing will allow you to pay the original loan off earlier, you may be slapped with this penalty. These penalties can be quite high at times. But sometimes even with the penalty attached it will be worth it. Sit down and do some math. Will the refinance save you more money than the penalty will cost you? Check you paperwork to make sure you don’t have this before you start looking at refinancing options.
Should I Refinance?
This will depend on several factors. If interest rates have dropped since you received your original mortgage it may be worth your time to look in to it. Generally a small drop in rates shouldn’t see you rushing out to refinance. This is an option you only want to take advantage of sporadically. If you are still comfortable making your payments and the rate has only dropped less than a percentage point, it may not be wise to refinance. A financial professional can go over the benefits with you.
If you have a large mortgage and find you are struggling to make your payments, then by all means check in to a refinance. You can save a lot of money doing this, and the bank would rather see you refinance than not make the payments and risk losing the home. When a bank has to take possession of a home it becomes a hassle for them. They will rarely get the owed value of the home when they put it up for auction, and if the house sits unoccupied it becomes the banks responsibility to perform any upkeep and maintenance on the property. If you are in a position where it’s becoming difficult, then looking in to refinancing is a great option that may provide a viable solution.
Another good time to refinance is if you are offered a fixed interest rate and you currently have a variable.
Variable interest rates are generally based on the Prime rate. As this rate goes up or down, your interest rate will adjust. Adjustable or variable interest rates can be very frightening. If prime goes up just a few points, then your mortgage will increase, and usually by more than just a few dollars. There are many reasons you may have signed in to an adjustable rate, but if may behoove you to refinance in to a fixed rate if at all possible. It will give you peace of mind, and you will know what your payments will be each and every month.