If you are considering refinancing your home mortgage, there are many factors you should consider before making your decision, especially if you are refinancing to save money on your current loan. Your savings will be dependent on the number of years left on your current loan and the amount that you intend to refinance on your home.
Reasons for refinancing include consolidating high interest loans like credit cards, liquidating the equity, or lowering monthly payments with a more favorable interest rate. While refinancing for debt consolidation may, in fact, save you a considerable amount of money, refinancing for a lower monthly payment can actually cost you money, particularly if you intend to remain in your home for more than 15 years. There are more costs to consider than monthly interest rates when refinancing.
If you currently are 15 years into a 30 year mortgage, you will probably not realize much in savings on a refinance, in fact you may actually lose money. If you are only 8 to 10 years into your 30 year mortgage, and your new interest rate is 1% to 2% lower than your current mortgage, you could in fact see some significant savings.
Always review the terms of any loan you are considering. If you don’t understand the terms, seek help from an attorney or accountant that you trust. If you find, after reviewing all the aspects of the loan including the closing costs, the monthly equity increase and the point at which you actually begin realize savings, that the amount of savings is not significant, than you are better off remaining with your current mortgage. It’s necessary to compare the amount of the principal and monthly payments of the new loan and your current loan based on the amount of time left on the loan.
Your debt to income ratio needs to be a consideration, especially if you are removing equity from your home. It is unwise to end up with an upside down loan, in other words, a loan on which you owe more than the value of your home. You will also need to know your FICO score. A high FICO score will enable you to receive lower interest rates. If your FICO score is low, you will probably not be able to get favorable interest rates.
Fees also add up the cost of the refinance. There’s the origination fee lenders require and be as high as $4000 for a $200,000 loan amount. This is to cover the cost of getting the loan processed. Another fee to pay is the closing fee that is generally 2% or 3% of the new loan.
Government programs instituted by the O’Bama administration allow for a waiver of the origination fees and closing costs in certain cases. If you lost your job because of the recession, or because you suffer from a serious medical condition, you may be eligible for a waiver of all or part of your loan fees. Since the waivers are decided on an individual case basis, each person must apply for the waiver before they receive their loan.
People with an adjustable rate mortgage who want to refinance with a fixed rate mortgage, and who qualify for the fee waiver, stand to save thousands of dollars over the life of their loan. Make sure you find the lowest available rate you are able to qualify for before proceeding with the refinancing of your home. If the refinancing means lower monthly payments and the costs don’t exceed the savings, refinancing is an option you should consider. Your best move may be to talk with an attorney who is familiar with real estate before refinancing.
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