Refinancing and why you might want to consider it
In a way, “refinancing” is a misleading term, because it suggests to many homeowners a process of changing or altering their mortgage. In fact, refinancing is simply the process of taking out a new mortgage, and using the money obtained to close out, or pay off, your current mortgage. That means refinancing involves many of the same steps that were involved in applying for and getting your mortgage in the first place. On the other hand, depending on how the terms of mortgages that are available now, compare with the terms of your current mortgage, refinancing can save you a significant amount of money.
Balancing act
Refinancing is most likely to make sense for you if your current mortgage has an interest rate that is higher than current interest rates. If you refinance with a lower interest rate, you’ll pay less each month, even if your new mortgage is for the same amount as your current mortgage.
Traditionally, the decision on whether or not to refinance has meant balancing the savings of a lower monthly payment against the costs of refinancing. But in recent years, lenders have introduced “no-cost” and low-cost refinancing packages that minimize or completely eliminate the out-of-pocket expenses of refinancing. Some of these refinancing packages may compensate by including some of the costs in the amount that is financed.
With traditional refinancing, the most often cited rule-of-thumb is that the interest rate for your new mortgage must be about 2 percentage points below the rate of your current mortgage for refinancing to make financial sense. However, with the newer low- and no-cost refinancing programs, it can be worth your while to refinance to obtain a smaller reduction in interest rates.
How do I decide, and what else is available?
There are many good reasons to refinance. The most common ones are described next. If you see your situation here, read more about what’s involved. You’ll get a pretty good picture of whether it could be a sensible alternative for you.
Most importantly, talk to us at Northeast Funding Services. With all of the options available today, there is no substitute for experience in working the numbers and deciding whether to refinance, and no one is more qualified to do that than our mortgage professionals.
Candidates For Refinancing
1. Save money on interest rates.
If you obtained your current mortgage when interest rates were considerably higher than they are now, refinancing could make sense for you. Refinancing at a lower rate will reduce your monthly payments, and if you plan to stay in your home for a reasonably long time, these lower payments will more than make up for the costs associated with refinancing.
2. Convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
You may have chosen an ARM for its lower initial interest rate. But if prevailing interest rates are currently low, you may decide to opt for the predictable monthly payments of a fixed-rate mortgage. Converting your ARM to a conventional fixed-rate mortgage can make sense if rates are low.
3. Convert an adjustable-rate mortgage (ARM) to an ARM with more desirable features or lower rates.
Most ARMs have protective features, called caps, that limit the amount the interest rate or monthly payments can increase. You may want to look for an ARM that offers you better protections than your current loan, which can not only make you feel more financially secure but deliver significant savings. And even though the interest rates on ARMs fluctuate with prevailing market rates, you may have one that’s tagged to higher indices, and carries a higher interest rate than other ARMs currently available.
4. Build up your equity faster.
If your financial resources have improved since you obtained your mortgage, you may decide to convert to a mortgage with a shorter term, perhaps a 15-year mortgage instead of a 30-year mortgage. The monthly payments will be higher, but your overall interest costs will be substantially lower, and if current interest rates are below those of your existing mortgage, your monthly payments may not increase by very much at all. This can be particularly advantageous as you near retirement. A shorter loan term may enable you to own your home before you retire.
5. Convert some of your equity to cash.
If you’ve held your mortgage for some time, you will have begun to reduce substantially the outstanding principal on your loan. That means you’ll be able to finance a considerably larger amount than you owe on your current mortgage. You can use the difference, which can be tens of thousands of dollars, for major purchases or to finance college costs.
Talk to us at Northeast Funding Services.
With all of the options available today, there is no substitute for experience in working the numbers and deciding whether to refinance, and no one is more qualified to do that than our mortgage professionals.
