When
should you refinance?
Some
common reasons homeowners refinance include:
Lower monthly mortgage payments
Convert an adjustable rate mortgage (ARM) to a fixed-rate mortgage
Raise funds for family expenses (i.e. college tuition)
Pay off high-interest loans
Home improvements
The old rule of thumb is that you should refinance your home if interest rates
fall more than 2 percent. That's because refinancing usually involves most of
the same closing costs (loan origination fee, prepaid interest, etc.) as the
original loan. For anything less than 2 percent, the savings on your monthly
mortgage payment might not be significant enough to be worth your while.
Savings
vs. time
For some homeowners, though, the 2 percent rule is not as important as the time
needed to break even on the refinancing. For instance, if it costs $3,000 to
refinance a house, and the monthly mortgage payment is lowered by $90, it would
take almost 3 years for the savings to cover the costs of refinancing.
If all the information (survey, title search, etc.) for your old loan is still
current, however, the lender may be willing to waive many of the fees. In
addition, you may be able to roll the closing costs of a refinance loan into
the new note. In other words, you don't avoid the closing costs, but instead
pay them back over time along with the rest of the loan. If you consider this
option, be sure to calculate the potential savings vs. the expense of paying
off a higher principal balance.
Keep in mind that refinancing usually lengthens the time it takes to pay off
your house. If you are 3 years into a 30-year mortgage and then refinance with
a new 30-year loan, you'll end up making payments on the house for 33 years.
Nevertheless, if the monthly savings are substantial enough, you still could
end up paying much less over the long haul with the new loan.
Adjustable
Rate Mortgages (ARMs)
Timing can also be a factor in switching from an ARM to a fixed-rate
loan. For example, rising interest rates might influence you to covert your ARM
into a fixed-rate loan if you plan to stay in your house for several more
years.
Conversely, you may plan to move in a year or two, and find a lender who is
willing to offer you dramatic interest rate savings with an ARM. In this case
(and as long as the closing costs are minimal), it might make sense to switch
from a fixed-rate loan to an ARM.
Equity
Refinancing with a new loan doesn't mean you have to give up all the
money you've paid towards your old mortgage. With each payment, you build up a
certain amount of equity in a property--which is the amount you've paid on the
principal balance of the loan.
For example, if you have a $100,000 loan at 8 percent, you would build about
$2,800 worth of equity in the first 3 years. Thus, if you refinanced, the new
loan would only amount to $97,200.
Raising
cash with home equity loans... use caution
If you've built enough equity, you can refinance in order to
take cash out of the property. Perhaps you need money to pay off your credit
cards, add a new bathroom, or cover the costs of braces for a child.
Regardless, lenders will typically allow you to borrow against the equity
you've built in your house, plus appreciation (often up to 75 percent of the
current appraised value). These types of loans are also called home equity
loans.
Be cautious, however, of lenders offering 100 percent or 125 percent home
equity loans--their rates are often markedly higher than traditional lenders.
In addition, any amount you borrow that is above the market value of the house
is NOT tax deductible.
Talk
to your lender
With all the different types of refinancing loans available today, you
should take some time to shop around and speak with several lenders before
making a decision. Be sure to discuss all the expenses and benefits, as well as
what will be expected of you, in advance. The more you educate yourself, the
better your chances of finding the right refinancing package.
Loading...
Please Wait..