Refinancing Your Home
When you refinance your home loan you are basically paying off your existing mortgage and taking out a new one. Consider refinancing your home if interest rates drop substantially from what they were when you obtained your mortgage. A lower mortgage interest rate can lower your monthly payment freeing up additional funds to save or invest.
Millions of Americans refinance their mortgage loans every year. So how do you know if it makes sense to refinance? Do you have any idea what is involved or how much it will cost?
Refinancing your mortgage will affect your financial future so it is important to understand the process and get prepared before you contact lenders.
When refinancing, you may want to switch from a 30-year to a 15-year mortgage if you plan on staying in the home for an extended period. This builds up equity faster and will save you thousands in interest over the life of the loan. However, the shorter the loan term, the higher the payment, but a greater percentage of that monthly payment is applied to the principal.
To help you decide if refinancing is a wise investment considering the fees and closing costs involved, divide your total cost to refinance by your total monthly savings. You will arrive at the approximate number of months it will take you to recover your upfront costs through savings on the lower payment. If this length of time is longer than you plan to remain in your home, it may not make sense for you to consider refinancing.
Why Refinance?
Homeowners choose to refinance for several reasons including:
- To obtain a lower interest rate.
- To build equity faster.
- To change loan type.
- To take advantage of an improved credit rating.
- To draw on equity already built in the home.
Regardless of your reason for refinancing, you should contact several mortgage lenders to compare costs of refinancing and to find the best interest rate. The first place to start is with your original lender and then contact several more to compare mortgage types, rates, and terms. Most lenders vary in costs and fees.
What to consider before you refinance
- Your reasons for refinancing.
- The interest rate on the existing mortgage.
- The interest rate of the new mortgage.
- The cost of refinancing.
- How much equity you have built up in your home.
- How long you plan to remain in your home.
- Your current income and credit status.
Costs involved in refinancing
Because you are applying for a new loan, you normally have to pay closing costs again. Closing costs include an application fee, title search and title insurance fees, the cost of an appraisal, a loan origination fee and any discount points, prepayment penalties and any legal services related to your loan.
Depending on the type of loan you get other fees may apply. Closing costs and fees can vary considerably from one financial institution to another.
The lender will also need verification of your employment and income, information about your debts and assets and the balances of your savings, checking and other accounts.
