Some Points to Consider When Planning a Mortgage Refinance
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by: marciafreeman
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Not every homeowner remains with the same mortgage loan for its entire term. Interest rates will most certainly change over the length of a 15, 20, or 30 year loan, and a homeowner would be wise to refinance his mortgage loan if rates drop. This can create substantial savings on interest over the life of a loan, so long as the homeowner educates himself on the potential benefits and pitfalls before deciding whether to refinance his mortgage.
To be sure, there are some good benefits to be realized if you decide to refinance your mortgage. The most obvious is that, by paying off your current mortgage with one that has a lower interest rate, you will have lower monthly payments. Refinancing a fixed rate or an adjustable rate (ARM) loan one with the other can have a significant impact on your monthly mortgage obligation. Keep in mind, though, that ARMs initially offer low rates that will fluctuate over time. Planning for this fluctuation can cause undue financial strain and it would be wise to seriously consider whether to refinance your mortgage with one that has a fixed rate. Refinancing your current mortgage with a loan that has a shorter term can also help you build equity faster, as higher monthly payments pay down principal quicker. Shorter term loans also mean lower overall interest charges.
Savings will not be realized right away when you refinance your mortgage as you must still come up with the closing costs on your new mortgage loan. These costs typically include application, origination and appraisal fees, insurance premiums, title search fees and county clerk fees, and the discount points paid upfront to lock in that lower interest rate. Any initial savings will be offset by these fees unless your new interest rate is at least one half a percentage point lower than your current loan.
Be sure to review your future plans before committing to a refinance of your current mortgage. You may not realize any savings if you plan to move within a few years. A refinance of your current mortgage makes financial sense only if you intend to remain in your home, as it may take several years to recover your closing costs. Check your credit score before deciding to refinance your mortgage. A low credit score and high debt to income ratio will have an adverse effect on your loan qualification chances. With lenders tightening up lending practices as a result of the 2008 and 2009 economic collapse, you most likely will be given less leeway than in the past.
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