Refinancing a mortgage is fashionable once again. Interest rates these days are the lowest in many years, and their descent will not seem to end any time soon. So, is it an excellent time to apply for a refinancing? Not necessarily.
Resetting the clock of your home mortgage in places like Meridian, Acres Green, Louviers, or Franktown is a significant decision with great potential to put you in worse financial shape if you do not do it right.
The good news is that many experts in finance and real estate went out of their way to share helpful advice about mortgage refinancing. The bad news, however, is that they are not always applicable. For starters, below are the recklessly blanket rules you should break if you want to get a positive result from a refi.
Refinance Only if Your Interest Rate Will Drop by 2 Percentage Points
Many experts say that you should consider refinancing your home loan only when you could decrease your interest rate by 2%. Anybody would welcome such an interest reduction, but it is not always realistic. Actually, it is a bit conservative.
If you are not going to refinance until you could drive down your interest rate by two percentage point, you might get stuck with your current mortgage until it matures. The truth is, a 1% reduction is not bad at all. Sometimes, even a quarter of a percentage point can justify a refinancing application.
The point is that you should do the math yourself. You should be able to have a clear idea about your potential savings in dollar amounts before you proceed to determine whether or not it is worth the trouble.
Refinance Only if You Reduce ‘X’ Dollars Every Month
Lowering your monthly mortgage payments does not translate to savings. The financial rewards of doing so may just be a mirage. Understand that doing the opposite will actually save you more money in the long run.
Higher monthly payments mean faster repayment, which naturally reduces the interest you need to pay. Crunch the numbers to know your overall interest expenditures between different loan terms.
Refinance Only if You Intend to Stay Put for ‘X’ Years
Admittedly, it is wise not to refinance if you do not see yourself living in your current house in the near future. Moving prior to the break-even period, the point when your savings from refinancing begin to exceed your expenses when you did a refinancing.
However, plans can and do change. Plus, your break-even period may come way before your relocation date. In that case, refinancing your mortgage may save you some cash you otherwise could not in the end.
Refinance Only if You Have Built Plenty of Home Equity
The proponents of this idea are those who love cash-out refinancing, where a portion of home equity is converted into actual funds that can be spent for whatever purpose. The problem is that it can take a lot of time to build significant home equity.
Not refinancing your mortgage because of a lack of equity has an opportunity cost. Waiting for your home loan to mature before applying for a refinancing may cost you more interest all in all.
The only real rule in mortgage refinancing is that not a single blanket rule makes sense for everyone. Analyze your situation, identify your goals, and study the long-term consequences of your action before you renew your mortgage.