Mortgage Refinancing Basics
by: LendingTree Editorial Staff
Your mortgage may have a 30-year term, but not many
homeowners stay with the same loan for that long. In fact, the average American
refinances his or her mortgage every four years, according to the Mortgage
Bankers Association. That’s because paying off your present mortgage and
taking out a new one can mean big savings over several years. However,
refinancing comes with a price in the short term, so it’s important to
consider both the costs and benefits before making your decision.
Why refinance?
Here are some reasons to consider refinancing your
mortgage:
1. To obtain a lower fixed rate. If you took out a
fixed-rate mortgage several years ago and interest rates have since dropped,
refinancing may lower your payments considerably. A $150,000 mortgage with a
30-year term and a rate of 8 percent, for example, carries a monthly payment of
$1,100. The same mortgage at 6 percent will have a payment of less than $900 a
month.
2. To switch to a fixed rate or an adjustable rate
mortgage. Adjustable-rate mortgages (ARMs) offer lower interest rates initially,
but some homeowners find the fluctuations stressful. If rates are on the way up,
you might consider locking in at a fixed rate and consistent monthly payment. On
the other hand, if you want to reduce your monthly payments and are comfortable
with the interest rate changes of an ARM, it could save you money to refinance
to an ARM.
3. To reduce your monthly payments. Refinancing for a
longer term will lower the amount you have to pay each month. You will end up
paying more in interest charges over the life of your loan, but if you’re
having difficulty making your current payments, this strategy could provide some
relief.
4. To turn home equity into cash. You may want to take out
a new mortgage with a larger principal, in order to turn some of your home
equity into cash for a major expense. This is called cash-out refinancing. The
advantage of taking out a loan secured by your home is that you can get a lower
rate of interest than you can with an unsecured loan or credit card. However, if
the interest rate offered for your refinanced mortgage is higher than your
current rate, a home equity loan or line of credit might be a better choice.
Is refinancing right for you?
If you’re refinancing in order to pay less interest, you
won’t usually see the savings right away. That’s because lenders typically
charge fees when you take out a new mortgage, and you may also have to pay a
penalty for getting out of your old one. To determine whether refinancing makes
financial sense for you, consider these issues:
1. How long you plan to be in your home. If you expect to
move in a year or two, you may never realize the potential savings you’d get
from refinancing. As a rule of thumb, the longer you plan to stay in your
current home, the more sense it makes to refinance.
2. The prepayment penalty on your current mortgage. Many
mortgages carry a penalty if you pay them off early. The amount varies, but it
is usually a small percentage of the outstanding balance, or several months’
worth of interest payments.
3. The costs of the new mortgage. When you take out a new
loan, your lender may charge a number of fees including application, appraisal,
origination and insurance fees, plus title search, insurance and legal costs
that can add up to thousands of dollars. Lenders may also charge discount
points, which are paid upfront to secure a lower interest rate. As a guideline,
expect fees to eat up any potential savings unless your new interest rate is at
least a half a percentage point lower than your current one.
To learn more about mortgage refinancing and when it makes
sense, visit http://www.lendingtree.com/cec/yourhome/yourmortgage/mortgage-refinance.asp
About The Author
The editorial staff at LendingTree is committed to helping
consumers become smarter borrowers. Visit http://www.lendingtree.com/cec
for more information and tips on buying, selling, and financing a home.
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