Today’s mortgage loan and refinancing market is thriving. With interest rates remaining at their record low, millions of homeowners have taken advantage of the low rates and refinanced their mortgage. Before you decided whether or not you want to refinance your mortgage there are a few things you need to know. Remember that refinancing to reduce debt can be a good move, but refinancing for more consumer purchases such as a car or vacation could set you back significantly. Also, it is important to read the fine print on you current mortgage to learn whether you’ll be assessed penalties or fees for refinancing. Find out whether you have a fixed or variable interest rate and what the terms are. Once you are aware of these possible issues and decide that you still want to move forward, you need to evaluate if refinancing is the correct decision for you.
Refinancing has the potential to help you reduce costs associated with borrowing money to own a home; it is not necessarily a strategy that makes sense in every situation. The rule of thumb for deciding to refinance is do it if you can reduce your interest rate by at least two percentage points. In addition, you should make sure you are comfortable with the amount of time it will take for your overall savings to compensate for the cost of the refinancing. Consider how long it will take you to break even from the closing costs per your monthly savings from the refinancing and whether you are planning on staying in your home for that long.
Other important variables to consider are the term of the mortgage or the amount of time it will take you to pay the loan’s principal and interest. The variability of the interest rate can also have a significant effect. Points or origination fees are fees that you pay to a lender or broker when you close the deal. While “no-cost” or “zero points” mortgages do not carry the up-front cost, it could be more expensive if the lender charges a high interest rate instead. The decision to refinance should only be made if the long-term savings outweigh the initial expenses.