New payments.
Your new, lower interest rate will mean lower monthly payments according to this site. Usually you’ll need to wait some time before this lower payment saves you enough money to make refinancing a good option.
Here’s an example of what we mean by that. Your fees, penalties, and all other costs to refinancing might add up to $5,000. If your new interest rate lowers your mortgage by $100 per month, you’ll need to wait for 50 months or more than four years before you reach your breakeven point. In a case like this, refinancing might not be the best option for you and it might be better to take that $5,000 you would spend on refinancing fees and put it toward your current mortgage to pay it down.
On the other hand, suppose your new interest rate saves you $350 per month. That means it would take just over 14 months to reach your breakeven point, and after that the $350 you save would be pure profit to you on your refinancing.
Be patient.
Remember that sometimes it’s better to work on what you need to do to get the best interest rate and wait to refinance. You might need to work on improving your credit score or may want to consider finding a job that pays more so you’re qualified for a lower rate.
Overpaying your mortgage even by a small amount during this time can also help as it means that when you’re ready to refinance sometime down the road, you’ll have less principal that you’ll need to refinance at all. Saving this money for more points when you can refinance is also a good idea, so consider starting a savings account just for this goal.
Other Considerations
Very often someone with an adjustable rate mortgage will be facing http://www.realtor.com/advice/finance/get-a-mortgage-preapproval/ sometime down the road and this rate may make their payment too high for them to manage or be comfortable with. Often a person will take an adjustable rate mortgage assuming that after so many years on their job they will get a raise and yet this may not be happening the way they assumed.
A fixed rate now might mean a higher rate than what you currently have but a lower rate than what you may be facing down the road.
You may have also made some changes to your personal situation that makes you qualified for a lower interest rate, such as improvement to your credit score, more earnings, and so on. These things will make you eligible for a lower rate than what you’re currently receiving.
Cautions Needed When Refinancing
If you’re looking to refinance a home loan, you’re probably doing a very good thing as far as your family’s financial health is concerned. Taking advantage of lower interest rates or locking in a lower rate before your adjustable rate increases can mean saving you hundreds every month and thousands over the life of the loan.
But this of course doesn’t mean that refinancing is always a good idea or always beneficial for you. Keep in mind a few cautions when it comes to refinancing a home mortgage loan.
Why refinance?
Why are you refinancing? If it’s to pay down your mortgage early or to lock in a lower interest rate, then this makes financial sense. That money you’re saving can be put toward the mortgage itself to pay it off earlier and to save money in interest charges or can be used to pay down other debt.
However if you’re refinancing in order to increase the home’s equity simply so that you can borrow for nonessentials then this might not be the best decision. Taking on more debt doesn’t get you ahead financially whether that’s mortgage debt or debt for any other reason.
Thinking seriously about your reasons for refinancing are going to be important if you’re interested in preserving your overall financial health.
Lower rate.
Many so-called experts state that refinancing only makes sense if you can lower your interest rate by at least two percentage points, that is, from 9% to 7% or from 8% to 6%, and so on.
However this is not a hard and fast rule. Refinancing will depend in a large part upon your breakeven point, the point when the money you spend on refinancing is saved through your lower monthly payment. If it takes just a year to reach that breakeven point then refinancing may be the right option but if it takes several years to reach that point then it might not be worth attempting.
