As mortgage rates continue to drop down many homeowners are thinking about a refinance in an effort to take advantage of these lower rates. There are a number of important considerations that must be considered before you should plan on taking this step though. Most experts advise that refinancing your home may be a good idea if you can lower your rate a minimum of two percentage points, but this is only one of many relevant factors involved with a decision to refinance.
If refinancing your home is attractive right now you will also need to look at all of the expenses and fees that this move may include. Calculate every fee and cost that the refinance will include, and then determine the length of time required before the lower rate will allow you to break even due to the costs that a refinancing involves. If the time to do this is extensive then refinancing may not be ideal even if you get the 2 points lower with your rate.
You will also need to evaluate the time that you plan to spend in the home. If you want to sell the home or move in the next few years then a refinance may not make much sense and could actually add to your mortgage debt instead of reducing this number instead. If you plan on staying in the home for decades then the cost of the refinancing may be worth it.
If you refinance the home and your newer mortgage rate is $100 less each month but the total refinance costs are $2,500 then it will take you 25 months before you actually start to save and lower the mortgage amount. For the first 25 months of the new mortgage terms you will need to use the extra $100 saved on the mortgage payment amount to pay for the refinance charges. If you sell the home in the next 2 years you will actually lose money on the refinancing option, making this step a big mistake.
Before you go about refinancing your home you should also determine the mortgage terms that you are agreeing to. Do all of the needed research and make sure you understand each of the terms with the new mortgage agreement. Know what the term of the loan is, whether it is a 15 year mortgage or a 30 year mortgage. Usually lower rates can be had for a 15 year mortgage but the monthly payments may be much higher due to the shorter term of the mortgage loan.
It is important that you understand what type of rate the new mortgage will have before you sign any refinance contracts. Some lenders offer fixed rate loans, some offer variable rate loans, and some lenders offer both types. Each type of interest rate is different, and may be an excellent choice in some cases but the wrong choice in others. Variable rate mortgages usually start out with a low initial rate but as time goes by the rate goes up, and this can be a problem for some people. Fixed rate mortgages keep the same fixed interest rate over the term of the loan so the payments stay the same each month.
If you are thinking about a home refinance make sure that you understand all of the terms and aspects of the new mortgage loan before agreeing to anything in writing. While most of the lenders who offer mortgage loans will be clear and up front about various aspects of refinancing your home this is not always the case. If you have any questions then a lawyer should be consulted before you actually refinance your home.