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Home mortgage refinancing is a tricky because it involves making a lot of educated guesses. Are interest rates likely to go lower? Are you likely to stay in the home for enough years to make the refinancing worthwhile? How do you figure out what the points mean in terms of your total savings? Let's start with a look at some reasons you might consider refinancing.
Home Mortgage Refinancing
- Reasons
1. To lower your interest costs.
2. To reduce the length of your loan.
3. To lower your payments.
4. To consolidate your debts.
5. To tap into you equity.
6. To get rid of a variable rate loan in favor of a fixed rate.
If you want to save on interest costs, it seems natural to think that you'll do just that with a lower interest rate. Often this will be true, but carefully consider the costs of the loan, including any fees and points that you'll pay. How many months will it take to save enough in interest charges to pay for these. If it takes Three years, for example, before you really start saving money, be sure you plan to be in the home for that long.
You may want to refinance to get the home paid off more quickly. Perhaps you have 25 years left on your mortgage loan, but you like the idea of a new 15-year loan. Should you do it? That depends. If the interest rate is lower on the new loan, it might be a good idea. If not, you could just start paying extra on the loan you have (if there are no prepayment penalties). That accomplishes the same thing, and you keep the low rate you have while avoiding loan fees.
If you want to lower your payments on your home mortgage, refinancing to either a lower interest rate or a longer term might make sense. Of course, if you are paying for a longer time, you'll probably pay much more in interest - even at a lower rate. Be sure that you have a real need for lower payments.
Consolidating debts is often one of the worst reasons to refinance your home.You effectively take short-term debts and turn them into long-term debts. Even at a lower interest rate you will generally pay far more in interest due to the lengthening of the payoff. However, there is a way that this can make sense. Get a new lower-interest rate loan on the home, roll your other debts into that, and then pay extra for a couple years - effectively paying those higher-interest-rate debts off in less time at a lower rate.
If you are refinancing to tap into your equity, do the math. Suppose you need $10,000 for a child's college tuition, for example. If refinancing can be done at a similar interest rate to the one you have, that's fine, but what if the current rates are 2% higher than what you have? On a $200,000 mortgage, that could mean paying $60,000 extra over 30 years. It may be better to pay high interest on a personal loan of $10,000, because you'll pay it off much sooner and won't have to pay higher interest on your entire mortgage balance.
Finally, before you sign any new home financing documents or mortgage contracts, be sure you understand everything. If you aren't sure about it, ask a lawyer to review it.
Related page: Glossary of Financing Terms.