If you are fortunate enough to own a home, mortgage refinancing may seem like an appropriate response to the many financial curveballs that life can throw at you ― from unexpected medical care expenses to the ever-rising cost of tuition. However, it is important to fully consider whether mortgage refinancing is the best option for your situation before you approach this type of financial undertaking. If done carelessly or incorrectly, a refinance could end up costing you more money in the end.
There is a common belief among homeowners that when interest rates drop, mortgage refinancing is the best way to go. While it’s true that a lower mortgage rate generally saves money on interest and helps build home equity faster, you must look at all the relevant factors before making a final decision. Make sure to consider the additional expenses (such as loan processing fees and closing costs) that come with mortgage refinancing to determine if it’s worthwhile.
The mortgage refinancing process generally favors homeowners who have numerous years left on their loan term as well as those who plan on staying in their home for years to come. This is because the fees associated with mortgage refinancing can be so expensive that some borrowers won’t break even on their deal for several years. While it takes time before the benefits of mortgage refinancing are fully realized, a lower interest rate can save you thousands of dollars over the life of your loan.
Homeowners who don’t want to participate in mortgage refinancing may consider getting a home equity loan (HEL) or home equity line of credit (HELOC) instead. Assuming you have built up an adequate amount of home equity, you may be able to borrow against it. In general, a home equity loan distributes funds in a lump sum, whereas a home equity line of credit allows you to withdraw money as you need it. And unlike mortgage refinancing, HELs and HELOCs usually have no closing costs, which could save you a few thousand dollars.
It’s advised that you refrain from using your HELOC like a credit card to pay for everyday purchases, even if the interest rate on your HELOC is lower than the interest rate on your credit card. This is because home equity loans are secured by your home. While neglecting credit card payments may result in a low credit score, neglecting to pay your HELOC can result in losing your home.
Ultimately, the decision of mortgage refinancing comes down to a cost-benefit analysis. In most cases, the mortgage rate being offered needs to be at least 1% lower than your current rate to make refinancing worthwhile. Make sure you consider the short-term and long-term risks, as well as any extra fees charged by the lender, before refinancing your loan.
If you are fortunate enough to own a home, mortgage refinancing may seem like an appropriate response to the many financial curveballs that life can throw at you ― from unexpected medical care expenses to the ever-rising cost of tuition. However, it is important to fully consider whether mortgage refinancing is the best option for your situation before you approach this type of financial undertaking. If done carelessly or incorrectly, a refinance could end up costing you more money in the end.
There is a common belief among homeowners that when interest rates drop, mortgage refinancing is the best way to go. While it’s true that a lower mortgage rate generally saves money on interest and helps build home equity faster, you must look at all the relevant factors before making a final decision. Make sure to consider the additional expenses (such as loan processing fees and closing costs) that come with mortgage refinancing to determine if it’s worthwhile.
The mortgage refinancing process generally favors homeowners who have numerous years left on their loan term as well as those who plan on staying in their home for years to come. This is because the fees associated with mortgage refinancing can be so expensive that some borrowers won’t break even on their deal for several years. While it takes time before the benefits of mortgage refinancing are fully realized, a lower interest rate can save you thousands of dollars over the life of your loan.
Homeowners who don’t want to participate in mortgage refinancing may consider getting a home equity loan (HEL) or home equity line of credit (HELOC) instead. Assuming you have built up an adequate amount of home equity, you may be able to borrow against it. In general, a home equity loan distributes funds in a lump sum, whereas a home equity line of credit allows you to withdraw money as you need it. And unlike mortgage refinancing, HELs and HELOCs usually have no closing costs, which could save you a few thousand dollars.
It’s advised that you refrain from using your HELOC like a credit card to pay for everyday purchases, even if the interest rate on your HELOC is lower than the interest rate on your credit card. This is because home equity loans are secured by your home. While neglecting credit card payments may result in a low credit score, neglecting to pay your HELOC can result in losing your home.
Ultimately, the decision of mortgage refinancing comes down to a cost-benefit analysis. In most cases, the mortgage rate being offered needs to be at least 1% lower than your current rate to make refinancing worthwhile. Make sure you consider the short-term and long-term risks, as well as any extra fees charged by the lender, before refinancing your loan.
This entry was posted
on Sunday, August 15th, 2010 at 8:02 am and is filed under
: Mortgage Refinancing.