Before you actually consider refinancing your mortgage, it is a good idea to learn the process of refinancing and what it is all about. When you decide to refinance your home, you have to begin the loan application process from the start. Usually, you have two options; one is to strike a new deal with your current mortgage lender and the second option is to shop around for a different lender.
People choose to refinance for a couple of reasons like getting a lower interest rate. A point might seem small, but when you calculate the number, that small point difference on the interest rate can save you thousands of dollars over the years as mortgages usually run for fifteen to thirty years.
Another reason you may want to refinance your home is to gain a shorter term, which can also save you thousands. This is usually an ideal decision when your income stream has increased and you want to make a change in your situation. Another common reason for refinancing is to get a lower monthly payment or get the fixed mortgage rate switched to adjustable and vice versa.
Before you decide to refinance your mortgage, there are a few things that you may want to consider:
The first is the actual cost of refinancing. Mortgage refinancing is never free and usually costs around 2 to 3 percent of the total loan cost. You can divide the mortgage fees by the monthly savings you will get from refinancing your home. This helps you discover how long you will have to wait before it breaks even.
Another important thing to consider is how much you will be penalized for paying off the loan early. Mortgage refinancing is basically paying off one loan by borrowing another. Add the penalty fees to your closing costs for refinancing and then calculate your breakeven point to ascertain that you’ll not be losing any money by deciding to refinance.
Probably the most important factor to consider when refinancing your mortgage is your equity. The difference between what your property is currently worth and how much you owe on it is known as equity. If the difference is less than what the loan provider wants to offer, you either can’t get the deal or may have to clear the difference in cash or another repayment method.
You may want to consult your real estate agent for a proper evaluation of your home and your finance manager to determine whether the latter is a good decision. You may have to wait until you can clear the difference or until your home value increases. Of course, you will have to exercise patience for the latter.
Refinancing is a feasible option for many homeowners, but only when all the pieces of the puzzle properly fit into place. If something does not work out just yet, do not become discouraged as mortgage refinancing is always an option in the future, when the time is ideal for your situation.