| Click on our Advertisement |
|
|
The most common and obvious reason for motivating people to refinance mortgages is to save money. Now with interest rates on the decline, most homeowners are wondering if this is the time to refinance.
Interest rates may have fallen since your original mortgage, but before deciding on refinancing, consider the fact that it will cost you time and money for savings in the long run. Crunch numbers and weigh your options and objectives to decide whether refinancing makes sense.
Number Crunching And Saving Money
Saving money is a good likelihood with high interest rates for your current mortgage. With over 1.5% higher than current rates, there?s a good chance of saving through refinancing. If you have an ARM, you need to compare the lifetime caps of mortgage and today?s ARMs to tell if your rate is sufficient to justify refinancing. Also the longer you plan to keep the property, say about 5 years, your chances of major savings are even higher.
The best indication of refinancing benefits is to estimate how long before you can recoup refinancing costs. First, calculate all costs related to refinancing like points, loan fees, appraisals, title insurance, prepayment penalties, etc. To simplify, take the total cost to refinance as $3,000, with a monthly reduction on payment by $150. It will initially appear to take 20 months to recoup costs. Beware of mortgage lenders and brokers who calculate savings to make the loan appear more attractive.
Remember refinancing will result in loss of tax benefits. Interest paid on mortgage loan is tax deductible, which prevents an accurate estimate of your recuperation period. To do this, find out your federal tax rate. With the federal tax rate, you reduce monthly savings by it. For instance take 28% and reduce the $150 monthly savings, which yield monthly savings of $108. Therefore refinance cost of $3,000 will take approximately 28 months to recoup costs.
So, Should You Refinance?
You have the last word in the matter. You know your financial situation best and your comfort limit. Generally if a few years can recoup costs, don?t plan on moving before then and go for refinance.
If more time is required for recouping, it may still make sense to anticipate keeping the property and mortgage for a long period. More than seven years of recuperation can be too risky to justify costs and problems. A lot can happen in all that time, mainly rates may fall even lower.
The Approach
Refinancing doesn´t always mean lots of money, as no-cost refinancing or no-point loans are also available. But they may not be best for long term due to pre-payment penalties. Usually, loans with lowest interest rates require paying points. They may require more up-front, and out of pocket expenses but the long tem benefit will be significant.
Under the right circumstances, loans can enable amortizing expenses over the loan term. Think it through, as it needn?t be the greatest benefit requiring you to at times pay interest. If the overall aim is to merely lower cash flow, it can be considered. But don?t forget that the long-term benefits may not be the same.
Conclusion
In case of a decision to refinance, start by shopping around. Check also if existing mortgages to make sure of no charges of prepayment penalty or if there are, how much.
It should be clear by now that whatever you save is subject to costs, which always vary. So, make sure you ask all the right questions of cost and be cautious if one claims to have no costs at all. Nothing in life comes free and never more so for mortgages
|
