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Finance Mortgage Resources |
Mortgage
Refinancing Basics
by: LendingTree Editorial Staff
Your mortgage may have a 30-year term, but not many
homeowners stay with the same loan for that long. In fact, the average
American refinances his or her mortgage every four years, according to the
Mortgage Bankers Association. That’s because paying off your present
mortgage and taking out a new one can mean big savings over several years.
However, refinancing comes with a price in the short term, so it’s
important to consider both the costs and benefits before making your
decision.
Why refinance?
Here are some reasons to consider refinancing your
mortgage:
1. To obtain a lower fixed rate. If you took out a
fixed-rate mortgage several years ago and interest rates have since
dropped, refinancing may lower your payments considerably. A $150,000
mortgage with a 30-year term and a rate of 8 percent, for example, carries
a monthly payment of $1,100. The same mortgage at 6 percent will have a
payment of less than $900 a month.
2. To switch to a fixed rate or an adjustable rate
mortgage. Adjustable-rate mortgages (ARMs) offer lower interest rates
initially, but some homeowners find the fluctuations stressful. If rates
are on the way up, you might consider locking in at a fixed rate and
consistent monthly payment. On the other hand, if you want to reduce your
monthly payments and are comfortable with the interest rate changes of an
ARM, it could save you money to refinance to an ARM.
3. To reduce your monthly payments. Refinancing for a
longer term will lower the amount you have to pay each month. You will end
up paying more in interest charges over the life of your loan, but if
you’re having difficulty making your current payments, this strategy could
provide some relief.
4. To turn home equity into cash. You may want to take
out a new mortgage with a larger principal, in order to turn some of your
home equity into cash for a major expense. This is called cash-out
refinancing. The advantage of taking out a loan secured by your home is
that you can get a lower rate of interest than you can with an unsecured
loan or credit card. However, if the interest rate offered for your
refinanced mortgage is higher than your current rate, a home equity loan
or line of credit might be a better choice.
Is refinancing right for you?
If you’re refinancing in order to pay less interest, you
won’t usually see the savings right away. That’s because lenders typically
charge fees when you take out a new mortgage, and you may also have to pay
a penalty for getting out of your old one. To determine whether
refinancing makes financial sense for you, consider these issues:
1. How long you plan to be in your home. If you expect
to move in a year or two, you may never realize the potential savings
you’d get from refinancing. As a rule of thumb, the longer you plan to
stay in your current home, the more sense it makes to refinance.
2. The prepayment penalty on your current mortgage. Many
mortgages carry a penalty if you pay them off early. The amount varies,
but it is usually a small percentage of the outstanding balance, or
several months’ worth of interest payments.
3. The costs of the new mortgage. When you take out a
new loan, your lender may charge a number of fees including application,
appraisal, origination and insurance fees, plus title search, insurance
and legal costs that can add up to thousands of dollars. Lenders may also
charge discount points, which are paid upfront to secure a lower interest
rate. As a guideline, expect fees to eat up any potential savings unless
your new interest rate is at least a half a percentage point lower than
your current one.
To learn more about mortgage refinancing and when it
makes sense, visit
http://www.lendingtree.com/cec/yourhome/yourmortgage/mortgage-refinance.asp
About The Author
The editorial staff at LendingTree is committed
to helping consumers become smarter borrowers. Visit
http://www.lendingtree.com/cec for more information and tips on
buying, selling, and financing a home. Copyright 1998-2006,
LendingTree, LLC. |
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