If you’ve been considering a mortgage refinance for your existing home loan, now is an excellent time to take advantage of historically low interest rates. As a homeowner in today’s pinched economy you might be concerned about overpaying for the new mortgage.
While mortgage refinancing is not for everyone it makes sense if you are looking to lower your monthly payment or convert your Adjustable Rate Mortgage to a fixed rate loan. Here are several tips to help you decide if mortgage refinancing is right for you and to avoid overpaying for your next home loan.
Everyone’s finances are different and mortgage refinancing won’t make sense in every situation. You might be familiar with the “two percent rule” of mortgage refinancing; however, this “rule” is simply bad advice and it makes more sense to determine how long it will take to recoup your expenses from refinancing than to use a blanket “two percent rule.”
Is Mortgage Refinancing Right For You?
To make an informed decision about refinancing your mortgage you’ll determine how much it will cost you to take out the new loan. This includes all closing costs and expenses associated with the new mortgage loan. Suppose for instance it will cost you $3500 to refinance your home and the new monthly payment is going to be $100 lower than your existing mortgage payment. In this example you would divide the cost of refinancing by the savings to determine the number of months it will take to recoup your expenses. ($3500/$100 = 35 months, just shy of three years)
If you can live with the amount of time it takes to recoup your refinancing expenses with the lower payment then mortgage refinancing makes sense in your situation.
Refinance Your ARM to a Fixed Rate Mortgage
Another common reason for refinancing is to convert a risky Adjustable Rate Mortgage to a more secure fixed rate loan. Many homeowners are finding themselves in financial hot water when their lenders adjust their payment amounts. Many Adjustable Rate Mortgages come with teaser rates that expire after a period of time which can lead to payment shock when the lender adjusts the payment amount to include the new, higher mortgage rate. If you find yourself in this situation and are unable to refinance because you owe more than your home is worth you risk losing your home to foreclosure.
Lower Your Mortgage Payments
Another excellent reason for refinancing your home mortgage is to get a lower payment. There are a couple of ways you can do this: qualify for a lower mortgage rate or extend the term length of your mortgage loan. Term length is the amount of time you have to repay your mortgage and a general rule of thumb is the longer your term length the lower your payment will be. You can learn more about your mortgage refinancing options, including costly lender junk fees to avoid by registering for the free mortgage videos available on this website.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
