Homeowners it seems are forever on the lookout for ways to cut down on their bills. And home refinancing has become the method of choice for many. But be careful before you jump into any deal. There are times when refinancing can end up costing you more than you save on your monthly bills. Let’s begin by examining when a new loan makes sense.
If your current loan has an adjustable rate, this is probably a good time to look into refinancing to a fixed rate loan. Chances are you’ll save money. Adjustable rate loans can be good if you get the loan when the rates are high. But in the current rate environment it doesn’t make sense. It could mean thousands of dollars in your pocket over the duration of the loan if you can simply lock in a low rate. Interest rates always go back up. When they do, you’ll still be locked in at the current low rate.
Another good time to refinance is if you have a balloon payment that will be due soon, and you simply don’t have the funds available. Finally, if your current mortgage has a rate higher than the current market, then seriously look into refinancing. Even a savings of 0.25% can make a huge difference over the course of a 30 year loan.
But in all cases you should carefully look at the closing costs for refinancing. They can be pretty significant. Then figure out how long it will take you to recover that money with whatever you will be saving every month.
The reason this is so important is because people rarely stay in one house for the duration of their loan. If moving is something you might be doing in the near future, you’re simply giving away money. You should be reasonably sure you’ll be in your current house at least long enough to make up what you spend in closing costs.
Most newly refinanced loans will also come with pre-payment penalties. These can be quite costly, with an average cost of 2-5 years. If you want to pay off the loan early, you’re also stuck paying the penalties. And again, if you might move and need a new loan while paying off your old one, the penalties may apply. These penalties must be measured against your monthly savings.
Finally, and perhaps most importantly, you’ll want to look at your monthly payment. This is especially true if you’re planning on taking advantage of a cash out option. The cash out option will give you spending money now, but it will also increase the balance on your loan. If your new interest rate is not significantly lower than what you are currently paying, your monthly payment could go up just because the balance is higher. You want a rate low enough that your payments will go down, in spite of the fact that your balance increases.
The bottom line is that home refinancing can be extremely beneficial to your bank account, but it can also jeopardize your financial health if you make a deal under the wrong conditions or at the wrong time. Weigh out the fees, costs and potential penalties against your monthly savings. If you see this will work, then begin shopping for a lender. Don’t just take the first offer you get because there are a wide variety of terms and rates available. And be sure to get recommendations from friends and relatives as well. They’ve been through the process and can let you know if their lender is easy to work with.
Good decisions can be extremely beneficial to your financial well being.
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