If you are considering refinancing your mortgage you might wonder what valid reasons are for taking out a new home loan. There are a number of different reasons people choose to refinance their mortgage loans; with mortgage rates at the lowest levels since 2004, now is the perfect time for you to get a new home loan. Here are several tips to help you decide if mortgage refinancing is right for you and to show you how to avoid paying too much for the new loan.
Why Refinance Your Mortgage?
The most common reason for refinancing is to secure a lower monthly payment. In order to lower your payment you first have to qualify for a lower mortgage rate…how much lower depends on your situation.
You may have heard of the so called “two percent rule” of mortgage refinancing; this rule says you should not refinance unless the new mortgage rate is two percent lower than your current rate.
This “two percent rule” is complete rubbish…you can save yourself a lot of money refinancing with a rate less than two percent…it just depends on how long it takes to recoup your expenses form refinancing. You can easily determine how long it will take to recoup your expenses if you know the new payment amount. Simply divide your total closing costs including any penalty you have to pay for early repayment by the difference between the new payment and the old payment amounts. This will tell you the number of months it will take you to recoup your expenses from refinancing your home loan and realize a savings.
Lower Payments Are Not The Only Reason
There are cases where it makes sense to refinance with a higher monthly payment. If your goal is to build equity in your home at a faster rate you could refinance with a shorter term length in addition to qualifying for a lower mortgage rate. While this would get you a higher payment you would be paying less to the lender in finance charges and would build equity in your home at a much faster rate.
Other reasons for refinancing to a higher monthly payment include borrowing against your home equity. Refinancing your home loan and taking cash back is generally cheaper than taking out a home equity loan or line of credit. Since you’re borrowing against the equity in your home you can use the cash for any reason and have the advantage of making one monthly payment instead of two with a home equity loan.
Watch Out For Garbage Fees
Once you’ve decided that mortgage refinancing makes sense you’ll need to be careful to avoid garbage fees and commission based markup of your mortgage rate. Taking out a mortgage is a lot like buying a used car…if you’re not careful it’s easy to overpay thousands of dollars for your new mortgage loan. You can learn more about your mortgage refinancing options including costly pitfalls to avoid by registering for our free mortgage video tutorial.