Mortgage loan refinancing is the process of changing the terms of your existing mortgage loan by securing new financing. In other words, you take a new loan and use the proceeds to pay off your old loan in full. You then owe the new lender, according to the terms of the refinanced mortgage.
Why Consider Mortgage Loan Refinancing
There are many reasons people consider mortgage loan refinancing. These reasons include:
- Getting a lower interest rate
- Getting lower payments
- Changing the type of mortgage
Getting Lower Payments
Getting a lower interest rate is one of the most common reasons homeowners consider mortgage loan refinancing. If you have a fixed rate loan, your interest rate was set when you got your mortgage. If national interest rates have dropped, it can be possible to lower your interest rate. Furthermore, if you have improved your credit or your income has changed, it can also be possible to get a lower interest rate.
Remember, when determining whether it makes sense to refinance your mortgage in order to get a lower interest rate, you must factor in the costs and fees associated with the loan. If it costs you $1000 in closing costs and fees to get the new loan, you need to calculate how long it will take you to make up that $1,000 through your interest savings.
You can make this calculation by determining how much you will save in interest each month. If you save $20 in interest each month through the refinance and spent $1000 to refinance, it will take you over 4 years to make back your $1000. Therefore, it only makes sense to refinance under those circumstances if you intend to remain in your current home or more than four years.
Getting a Lower Payment
While switching to a lower interest rate can lower your monthly payments, you can also refinance to lower your payments even without changing your interest rate in some cases. This is possible if you extend the term of your mortgage. For example, if you have 20 years left on your mortgage, you can refinance into a new thirty year mortgage in order to slash your monthly payments.
While this might provide you with breathing room if you are having difficulty making your monthly payments, remember that you will end up paying more in interest if you stretch out the amount of time it takes you to pay back your loan.
Changing the Type of Mortgage
If you selected an adjustable rate mortgage, a balloon mortgage, hybrid mortgage, or an interest only mortgage, you may refinance in order to change the structure of your loan. For example, you can refinance into a fixed rate mortgage when rates are low so you don’t need to worry about them adjusting back upwards. If you have a balloon mortgage, you can refinance into a standard 15 or 30 year mortgage to pay off the balloon payment that comes due at the end of your term.
In many cases, when interest rates are low, most buyers with alternative forms of mortgages should consider mortgage loan refinancing in order to protect themselves from rising payments. However, again mortgage loan refinancing may not be wise unless you are planning to remain in he house for a longer period of time, due to the closing costs associated with mortgage loan refinancing.
No comments:
Post a Comment