Get this straight. A refinance is still a loan. Although you can pay off the old loan you add more years to pay off the new one, your refinance. The refinance comes with new everything - rates, terms, and loan agreement but you can make the new loan work for you and squeeze out some savings or break even just a few months shy of two years, that is if your loan is a little bit over $900,000.
Reasons for refinancing include consolidating high interest loans like credit cards, liquidating the equity, or lowering monthly payments with a more favorable interest rate. While refinancing for debt consolidation may, in fact, save you a considerable amount of money, refinancing for a lower monthly payment can actually cost you money, particularly if you intend to remain in your home for more than 15 years. There are more costs to consider than monthly interest rates when refinancing.
Lower interest rates might be tempting but if you are in the 15th year of a 30 year mortgage, you will end up the loser. All the money saved from the existing loan will go up in smoke. But if your mortgage is just eight years old and the interest rate is 2% or 1% more than the new rate, go ahead, get a refinance.
Don't just sign on the dotted line and trust your lender's integrity. Review every aspect of the terms of the loan including origination fees and closing costs. How much of your monthly payment will go to equity and how much to interest? At what point will you actually break even on the loan? Compare all the terms to the terms of your current mortgage and see if, over the life of the loan, you will actually realize any savings. You may want to seek advice from a real estate attorney or account if you don't understand the terms and costs of your current loan or the cost of refinancing.
Your debt to income ratio needs to be a consideration, especially if you are removing equity from your home. It is unwise to end up with an upside down loan, in other words, a loan on which you owe more than the value of your home. You will also need to know your FICO score. A high FICO score will enable you to receive lower interest rates. If your FICO score is low, you will probably not be able to get favorable interest rates.
A point that many people fail to consider when refinancing is that the fees and closing costs are part of the cost of the loan. The origination fee for the lender and the closing costs for the new loan can add thousands of dollars in costs to the new loan. This may offset any savings you realize with a lower interest rate.
If you qualify under the new government programs, you may not have to pay some or all of the fees. If you are refinancing because of the loss of a job due to the recession or due to serious illness, the fees may be waived in your case. The decision to waive the fee is made on a case by case basis, so before refinancing you should investigate whether you qualify for this waiver. This fee waiver will make refinancing more affordable for those who qualify.
Until you have reviewed your financial situation and the requirements for a refinance, you can assess your chances for paying off a refinance successfully. But if you are dealing with an Adjustable Rate Mortgage and want to switch to a lower Fixed Rate Mortgage, lock into the lowest rate now after considering everything that goes into a refinance. If you'll break even soon enough and pay lower rates which you can comfortably afford, then by all means, check this option.
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