First home buyers often struggle with mortgage, and knowing when to refinance their mortgage rate on their home. Here, we offer some refinancing basics so you can make informed decisions before signing on to refinance your home.
Refinancing a mortgage rate means that you have to pay off an existing loan and replace it with a new one. Homeowners don't chose to refinance for the same reasons though, and in some cases, it may not the most suitable option for you. However, incentives like gaining a lower interest rate, shortening the term of a mortgage contract loan, and wanting to convert from an adjustable rate mortgage (ARM) To a fixed-rate mortgage, or vice versa, may be enough of an incentive for people to refinance and thereby save some money on their monthly payments. Whatever the reason, refinancing comes with both benefits and disadvantages. Also, straight out of pocket, refinancing already puts 4% and 6% of the loan's principal costs out of the original mortgage amount, which includes things like appraisals, title search, and application fees so in theory, you have to spend money in order to save money. This presents homeowners with a tough decision, and they must determine whether refinancing will be a benefit or more costly in the long run.
To secure a lower interest rate is one of the main priorities for those who chose to refinance. If you can reduce your interest rate by at least 2%, it may be a more lucrative option. However, if you're saving 1%, you may want to reconsider. According to some lenders, 1 % savings is enough of an incentive to refinance but with all the trouble, consult with multiple lenders to see if you can get a lower interest rate.
Many people want a shorter term than they had originally signed up for. Cutting the term length may only bring your monthly payments up slightly, and if it's well within your budget, there's no need to drag on the loan term for longer than it has to be. Homeowners who wish to convert from a fixed-rate mortgage to an adjustable rate or vice-versa is another reason to refinance. In a falling interest rate environment, converting to an ARM (Adjustable-rate mortgage) may be a better idea because should the rates keep on falling, periodic rate adjustments will save you money and result in smaller monthly mortgage payments. This also eliminates the constant need to refinance every time the rates decide to drop.
Lastly, if you want to consolidate your debt, it's important to reconsider taking this money out from your home equity loan. Especially for bigger expenses, refinancing their home to take out a large sum of money only results in financial loses, instead of gain. The question is, should you refinance your home? Remember that refinancing already takes out of your pocket 3-5% of the loan's principal, it takes years to make by that cost with the saving associated with the lower interest rate you are seeking, and if you're not planning on staying in your home for more than a couple years, refinancing may just negate or put you deeper into debt rather than less of a financial strain. Shop around for mortgage rate quotes and see if refinancing is the right option for your budget and financial needs.