In my cases, if you are refinancing your mortgage it means that you are paying off your current mortgage and at the same time taking out a new mortgage, usually at a lower rate. Most homeowners decide to refinance when the interest rates are lower, not only to enjoy lower monthly mortgage payments, but to save money over the long term. At the moment, mortgage rates are low and it’s a great time to refinance, although the average homeowner refinances every four years or so, anyway.
It does cost money to refinance – there are miscellaneous fees and charges, although often these can be included in the amount to be refinanced, so you aren’t paying them up front. The decision to refinance may depend on several factors: whether you intend to stay in your home for at least several years, the amount of equity built up, as well as your overall financial picture. In general, if you are going to save money by refinancing, it is probably a good idea; if you are selling and moving in the next year or two, it probably doesn’t pay to refinance.
Refinancing also allows a homeowner the opportunity to switch from a much riskier adjustable rate mortgage (ARM) to the safer option of a fixed rate mortgage, (FRM). This way, refinancing not only saves money, but offers more financial stability as well. If mortgage interest rates seem to be going up, it may be a good idea to refinance at a lower fixed rate; however, if you have a fixed rate mortgage at a rate that is somewhat high, it may benefit you to refinance to an ARM. A fixed rate mortgage also has the advantage that the terms and conditions are protected by law.
Some homeowners refinance in order to lower the term, or length of their mortgage. If you are a homeowner with a 30 year mortgage and refinance to take advantage of a lower interest rate, you may also be able to shorten the term of the mortgage at the same time – taking out a 15 or 20 year mortgage, perhaps instead of a 30 year. If you can afford to pay the extra monthly amount on a shorter term mortgage, this can be an easy way to more quickly realize your goal of home ownership.
Your credit rating is also going to affect the interest rate you are offered; and may influence your decision whether to refinance or not. Lenders will generally offer better terms and lower rates to borrowers with better credit. Your credit score can make a big difference - your monthly payments can be anywhere between $50 and $250 higher, if you have a poor credit score that is below 630. It’s also worth your while to check your credit report, not only for accuracy, but to see if it has improved over the last few years, prior to applying to refinance.
It is often easier and less expensive for your existing lender to refinance your mortgage, although you are not obligated to use their services and it doesn’t hurt to shop around and compare rates and charges. Refinancing through your existing lender may mean less paperwork as they may not require a title search, new property appraisal, etc. On the other hand, it doesn’t make sense to save a little bit on the closing costs when another lender is offering a much lower interest rate. If you are comparing lenders, be sure to request a detailed breakdown of fees and charges.
So if you have decided to refinance, how much can you save? The savings, both short term and long term can be substantial - if your current mortgage is for several hundred thousand dollars, you will benefit from a much lower monthly payment amount, with even a slight reduction in the interest rate. An interest rate that is just one point less can potentially save you around $5,000 on the average 15 year mortgage. As a rule of thumb, if the interest rate on your new mortgage will be at least 2% lower than your current rate, it almost certainly pays to refinance.
Although refinancing your mortgage can potentially save you a lot of money, it isn’t the right strategy for everybody. You should always consult with both a mortgage advisor and a tax professional to see if refinancing will benefit you.
Rachel Jackson is a freelance writer who writes about mortgages and home ownership, often discussing a specific aspect of owning a home such as
refinancing home mortgage.
