Recession is not all grim. For those of who have kept their noses clean and religiously paid their dues, the crash actually presents a unique economic opportunity. While larger investors and the few middle class families with extra cash make speculative investments on foreclosed properties, what benefit is there for people who have neither the cash nor the guts to snap up bargain homes they don’t need?
One great reason to refinance is to save money. Income is not just a product of investments, but it can also be accomplished through savings and that is at a phenomenal level nowadays. Many still don’t understand, though, how refinancing can save.
There are two ways you save by refinancing and they are lower mortgage payments monthly and a lower interest rate. Lower monthly payments are for sure but the real challenge comes when dealing with the interest rate.
Generally, two factors determine the interest rate your bank or your mortgage provider gives you on a first mortgage – prevailing market rates and your credit rating. Both of these factors fluctuate. If you have bought your home and taken out a mortgage three to five years ago, interest rates have dropped significantly since then; now would be a good time to consider refinancing, before market rates pick up. Additionally, if your credit rating has significantly improved since, refinancing might also save you a significant amount.
The typical closing cost for refinancing are usually 2-3%of your total principal and are required to be paid up front. That, along with the market going rates, will determine your savings. Today, though, if you shop around you may find a few no-cost refinance offers from various mortgage lenders.
Speaking of no-cost offers, beware of such offers. Freebies are a thing of the past. Companies who cover closing costs do not eliminate this cost from your account; they collect it in alternative ways, often in higher-than-market interest rates. If you have a short-term horizon, however, you can enjoy upfront cost savings without the burden of high mortgage rates for a long period of time.
To find out if refinancing is worthwhile for you to do an easy way to decide is to add up the remaining payment total on your current mortgage (and include all charges applicable) and then compare it to the total payments you expect to be making under the refinanced mortgage and be sure to include closing costs. You will have a cash layout with both choices so make the smaller one your choice.
Alternatively, you can use the savings approach. To determine if refinancing is sound, calculate the interest payments you expect to pay on the outstanding balance of your current mortgage. Next, calculate the total projected interest of your best refinance option. Extract the difference and compare this with the closing costs of the related refinance option. If your interest savings figure is larger than the cost of refinancing, go ahead and do it; you’d actually save. If it’s the other way around, stick with your first mortgage.
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