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Refinancing 101

Looming over many home owners is the question of refinancing. Chances are that when you originally financed your home, you did not get the best rate either because of credit or lack of knowledge. So now is the time to refinance. “Refinancing Your Loan,” an article published by mortgage-x.com, offers helpful information for those who are contemplating or have questions about refinancing.

The main reason most people refinance is to receive a lower interest rate. Chances are, the national interest rate is lower than it was when you originally financed your home and refinancing at this lower rate will save you money on your monthly payments.

Besides the interest rate, there are other important factors to consider when refinancing.

“If you are thinking about refinancing your mortgage, you might want to consider other types of mortgages. For example, you might want to look into a mortgage with a shorter term. If you currently have a 30-year fixed rate loan, you might consider refinancing to a 10-, 15-, or 20-year loan which will lower the total amount of interest you will pay over the life of the loan and will let you to pay off your loan faster.”

Another option relating to types of mortgages is to think about switching from an adjustable rate mortgage (ARM) to a fixed rate mortgage. This will allow you to know what your monthly payment will be for the duration of the loan.

You can also do the contrary and switch to an ARM because you expect interest rates to be lower in the future.

The type of mortgage loan you select will depend on how long you expect to stay in your current home and how much you can afford on a monthly payment.

“If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Two-Step Mortgage. An Adjustable Rate Mortgage traditionally offers lower interest rates during the early years of the loan than fixed-rate loans. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years. A Balloon Mortgage offers lower interest rates for shorter term financing, usually five or seven years.”

If you plan on staying in your home beyond seven years, you would best benefit from a 15-year or 30-year fixed rate mortgage.

The actual steps of refinancing are going to be almost identical to when you financed your first loan or mortgage. All refinancing is, is taking out a new mortgage.

“To figure out whether it pays to refinance, you must calculate the total refinancing costs and answer the question that may help you decide: How many months will it take to break-even? You should consider refinancing if you plan to stay in your home for more than the time it takes to break-even.”

For example: “If the total refinancing costs are $2,000, and your monthly savings on the new loan are $100, it will take you 2000/100=20 months to break-even.” So, if you do not plan on living in your home for at least 20 months, it would not make sense to refinance.

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