Is it Time To Refinance Your Mortgage?
Refinancing is the process of paying off an existing loan with the proceeds from a new loan, and using the same property as collateral. Because the interest rate on the new mortgage is less than the old, the loan costs less and you save money. However, refinancing isn’t appropriate for every homeowner. To know if it’s right for you, understand how these arrangements work.
Another reason to refinance is to repay your mortgage faster, which is done by switching a long-term loan for one with a shorter term. With it, your mortgage payment would be higher, but you’d pay much less in interest over the life of the loan while building equity more quickly.
Cash-out refinancing yet another attractive option. With this type of loan you’d refinance your current mortgage plus take out some cash from the equity you’ve built up. The benefit? Interest rates on the cashed-out portion are often lower than a home equity line of credit, home equity loan, or second mortgage.
Much of the loan’s price depends on points. One point equals one percent of a loan, and to get you the lowest rate, most lenders will charge several points. The total cost can run between three to six percent of the whole amount you borrow. Therefore, on a $100,000 mortgage, the lender might charge between $3,000 and $6,000 in points alone.
Some lenders do offer zero points, but the loan will have a higher interest rate. So while a “no points loan” may indeed reduce your initial outlay, your monthly payment will be higher.
To know what combination of rate and points is best for you, compare the amount you can pay up front with the amount you can pay monthly. The less time you keep the loan, the more expensive points (and other refinancing costs) become. For example, if your refinancing costs are $3,000 and your payments are $125 lower each month, it will take you 24 months just to break even.
The tax effect
If, however, you are in the final years of your mortgage, your payments probably consist of more principal and less interest. In that case, refinancing your mortgage with a longer-term loan will mean you’ll again pay more in interest – and increase your tax deduction.
The best deal
When you refinance, your lender must provide a written statement of the costs and terms of the financing before you become legally obligated for the loan. Review this statement carefully. If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to cancel within three business days following settlement, receipt of your disclosures, or receipt of your cancellation notice, whichever occurs last.
If your lender charges an application processing fee, ask how much it is and under what circumstances it is refundable. Some lenders do not offer refunds if you are not approved for the loan or if you decide against taking it.
So is it time to refinance your mortgage? If you will come out ahead financially, then it is definitely worth considering. However, if the difference is minimal or nil, then save yourself the time and trouble. Refinancing is not the magic answer for everyone.
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