Making the Refinancing Decision
By: Raynor James | Posted: 09th March 2007
If you are a homeowner, you probably took out your original home loan under a bit of stress given the need to fund the purchase before escrow closed. Now that you are in the property, refinancing might be a smart decision.
Let’s start with the simple stuff. What is refinancing? It is simply the replacement of your current home loan with another mortgage. The idea, of course, is to tailor the second mortgage in such a way that it provides a financial benefit to you. In most cases, this means obtaining a loan that has a lower interest rate. It can also mean a loan that has a lower monthly payment or a shorter term. The specifics are dependent on what you are after. Since you are not under pressure to meet a closing date on a purchase, you can take your time to shop for the perfect loan and go through the application process with the minimum of stress.
The real question is whether you should actually refinance or not? The answer is highly dependent upon your specific situation. Issues that can go into the decision can include the time you intend to remain in the home, whether you have an adjustable or fixed rate loan, your credit and so on. Let’s take a look at a couple of scenarios.
Timing is often an issue most people fail to think about when deciding to refinance. Specifically, the issue is how long you expect to remain in the property. If you intend to move in a year, it almost never makes sense to refinance. Why? Well, the savings you will gain in the interest rate or lower monthly payment will be dwarfed by the costs you have to pay for the refinance. Yes, you will have to pay fees for origination, appraisals and so on.
A second issue to consider is stability. Let’s assume your original loan is a fixed rate mortgage at 6.5 percent. You are considering whether to refinance to an adjustable rate mortgage at 6.0 percent. Half a percent can save you a lot of money over the life of the loan, but what about stability? Interest rates are still very low from a historical perspective. Eventually, they will go up. When they do, the rate and monthly payment will remain the same on your current fixed mortgage, but it will go up an any new adjustable rate mortgage. So, should you stick with the fixed? There is no correct answer. It is your decision, but just take the issue of stability into account.
At the end of the day, many people refinance their original home loans without giving it much thought. There is no absolute reason not to refinance, but make sure you take the above issues into account when making your decision.
Raynor James is with FSBOAmerica - free information on mortgage loans.
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Tags: money, scenarios, stress, escrow, interest rate, fixed rate mortgage, fixed rate loan, adjustable rate mortgage, interest rates, specifics, financial benefit, appraisals, refinancing, home loan, application process, second mortgage, smart decision, simple stuff, half a percent, closing date