Refinancing can mean big savings!
Refinancing your current mortgage, at a lower interest rate, can save you money by reducing your monthly payment. Depending on your circumstances it may be that the larger your mortgage, the more money you save by refinancing.xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Whether refinancing your home makes sense for your situation depends upon the following: Will the savings you realize by reducing your monthly mortgage payments be greater than the cost’s associated with refinancing?
When it comes to making this kind of decision, it usually boils down to the fact that the interest rate cut required for you to come out ahead will vary dramatically depending on:
1. How long you plan to hold the new mortgage – 5, 10, 15, 30 years.
2. How many years you've already paid on your current mortgage.
3. The increasing opportunities available to you in reducing your closing costs.
It is often said that you should refinance when mortgage rates are 1 to 2% lower than the rate you currently have on your loan. A small reduction in the loan rate can still trim your monthly payment. For example, the monthly payment (excluding taxes & insurance) would be about $770 on a $100,000 loan at 8.5%. If the rate were lowered to 7.5%, the monthly payment would be about $700, a savings of $70 per month.
What fees can I expect to pay? In addition to an application fee you will likely have to pay an origination fee (typically 1% of the loan amount). In many cases you will have to pay much of the same costs that you had to pay when you applied for your current mortgage (title search, title insurance, misc. lender fees, etc.).
If you plan on staying in your current home for at least a few years, paying discount points to lower the loan's interest rate can be a good way to lower your required monthly payment (and possibly increase the loan amount that you can afford to borrow). If you only plan to stay in your current home for a year or two, your monthly savings may not be enough to recapture the cost of the discount points that you paid up-front – therefore refinancing may not make sense for you.
Due to the drastic movement of interest rates, mortgage rates can change dramatically from the day that you apply for a mortgage to the day that you close on the loan. If interest rates rise sharply during the application process, it could make your mortgage payment larger than you previously thought. To protect yourself against this uncertainty, a lender can allow the you to 'lock-in' the loan's interest rate, guaranteeing you the prevailing loan rate for a specified period of time (often 30-60 days). A lender may or may not charge a fee for this service. No one knows for sure how interest rates will move at any given time, but your lender may be able to give you an estimate of where mortgage rates are headed. If interest rates are expected to be volatile in the near future, you may want to consider ‘locking-in’ your rate. In today’s market it can be a huge benefit to you and your family to refinance your current home mortgage to take advantage of the potential savings. The extra money you save on your monthly payment can be used for a myriad of other expenses or just to start “feathering” that nest egg for retirement or for the purchase of a vacation home. Whatever the reason, know that the time is right if refinancing makes sense for your unique situation.