Refinance Your Mortgage With Your Eyes Wide Open
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by: marciafreeman
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It makes good financial sense to refinance your mortgage when interest rates drop below the rate of your current loan. However, before you enter into an agreement to refinance your mortgage, completely familiarize yourself with the loan terms so that you know what you are committing to. Educate yourself. The foreclosure crisis of the late 2000s dramatically illustrates the consequences of leaping before looking.
Homeowners refinance their mortgages for a number of reasons. One of the most popular reasons is to lock onto a more favorable interest rate when a current (adjustable rate) mortgage is about to reset. Another popular reason to refinance a mortgage is to gain access to the equity in the home for home improvement or debt reduction purposes by taking out a loan in an amount greater than the outstanding balance of the current one. The benefits of this strategy come at income tax time as mortgage interest is deductible, whereas consumer loan interest is not.
There are some homeowners who refinance a mortgage solely to shorten the repayment period. Even though the amount of the monthly mortgage payment will be higher, the overall interest paid over the life of the loan will be lower and the mortgage will be paid off earlier. Regardless of the motivation behind your decision to refinance your mortgage, you should do some preliminary investigation into available mortgage products so that you understand exactly what you will be responsible for.
Another point to consider when deciding whether to refinance your mortgage is how long you intend to remain in your current home. It typically takes about two years to recoup your loan closing costs from the savings realized from a lower monthly mortgage payment. Refinancing your mortgage only to turn around and sell the home shortly thereafter does not make good financial sense.
The process remains the same whether you refinance a mortgage or take out a new loan. You are still responsible for loan closing costs, which include application fees, title update and review charges, title insurance premiums, document processing fees, discount points, appraisal fees, attorney fees and county clerk filing and recording fees These costs can either be paid upfront or added to the mortgage.
So long as you completely understand the terms of your loan and you intend to stay in your home long enough to recoup your closing costs, refinancing your mortgage can be one of the best financial moves you will every make.
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