If you are considering refinancing your home loan but are unsure if a new mortgage is right for your situation, there are several good reasons for taking the plunge. Many homeowners refinance because they need a lower monthly payment, to borrow against the equity in their home, or to pay less with a lower mortgage rate.
Mortgage Refinancing Can Lower Your Payment
There are several ways to lower your payment amount when refinancing your home loan. Ideally, if you qualify for a lower mortgage rate you will pay less to the lender for your financing and your monthly payment will go down. Many people will tell you not to refinance unless you qualify for a mortgage rate that is two percent lower than your existing loan. This “two percent rule” is complete rubbish; you can determine if refinancing makes sense for your situation you should evaluate the loan on a cost/savings basis.
Start by looking at the total cost of the mortgage, fees, points, and closing costs and divide this amount by how much lower your new payment will be. This will tell you the number of months it will take for you to break even and realize any savings from the new mortgage. Just make sure the mortgage rate you are basing this decision on does not include Yield Spread Premium and you’ll be ahead of 90% when it comes to choosing the perfect mortgage loan.
Theft by Yield Spread Premium
If you’re unfamiliar with Yield Spread Premium, it’s the markup your loan representative adds to your mortgage rate for a commission. Mortgage companies and brokers mark up interest rates because the lender pays them a bonus of one percent of your mortgage amount for every quarter percent they mark up your rate. This bonus is in addition to the origination fees you’re already paying for their services. Fortunately for you, homeowners who learn to recognize this unnecessary markup can avoid paying it.
What happens if you can’t qualify for a lower mortgage rate and still want a lower monthly payment? Is mortgage refinancing still a good idea?
If you are unable to qualify for a lower mortgage rate there are several options for lowering your monthly payment amount. One way to lower your payment is to choose a mortgage with a longer term length. Term length is the amount of time you have to repay the loan. The longer the term length you choose, the more time your payment will be spread over. This results in a lower payment amount; however, you will pay more over the life of your loan in finance charges. Another option for lowering your payment is to choose an interest only mortgage. As the name implies, the payments for this type of mortgage are based only on the amount of interest due in a given month.
Interest only mortgages are a risky option for refinancing; however, homeowners who understand the risks can leverage this type of Adjustable Rate Mortgage to their advantage. You can learn more about refinancing your mortgage while avoiding costly problems with our free mortgage refinancing video tutorial.