Even though the term of your mortgage maybe 30 years, not many people keep the same loan for that long. According to the Mortgage Bankers Association, the average American refinances his or her mortgage every four years. This is because paying off your old mortgage and getting a new one can save you a lot of money over time. But in the short term, refinancing costs money, so it's important to think about both the costs and benefits before making a decision.
Why change loans?
Here are a few reasons you might want to think about refinancing your mortgage:
- To switch from a fixed-rate mortgage to one with an adjustable rate. The interest rates on adjustable-rate mortgages (ARMs) are lower at first, but some homeowners find the changes stressful. If rates are going up, you may want to lock in a fixed rate and a regular monthly payment. On the other hand, refinancing to an ARM could save you money if you want to lower your monthly payments and don't mind if the interest rate changes.
- To get a fixed rate that is lower. If you got a fixed-rate mortgage a few years ago and interest rates have gone down since then, you may be able to lower your payments by a lot by refinancing. For example, a $150,000 mortgage with a 30-year term and an 8 percent rate have a $1,100 monthly payment. At 6 percent, the payment on the same mortgage will be less than $900 a month.
- To lower how much you pay each month. When you refinance for a longer-term, the amount you have to pay each month will go down. Over the life of your loan, you will end up paying more in interest, but if you are having trouble making your current payments, this could help.
- To get cash from the value of your home. You might want to get a new mortgage with a bigger principal if you need to use some of the money you have built up in your home to pay for a big expense. This is called refinancing with cash-out. When you take out a loan that is secured by your home, you can get a lower interest rate than with a credit card or loan that is not secured. But if the interest rate for your refinanced mortgage is higher than your current rate, you might be better off with a home equity loan or line of credit.
Should you get a new loan?
When you refinance to pay less interest, you probably won't save money right away. That's because most lenders charge fees when you get a new mortgage, and you may also have to pay a fee to get out of your old mortgage early. Consider the following things to see if refinancing makes financial sense for you:
How long do you want to live there? If you plan to move in a year or two, you might not be able to save money by refinancing. As a general rule, refinancing makes more sense the longer you plan to live in your current home.
- How much the new mortgage will cost. When you get a new loan, your lender may charge you application, appraisal, origination, and insurance fees, as well as title search, insurance, and legal costs that can add up to thousands of dollars. Discount points, which are paid upfront to get a lower interest rate, may also be charged by lenders. As a general rule, fees will wipe out any possible savings unless your new interest rate is at least 0.5 percentage points lower than your current one.
- The penalty for paying off your mortgage early. If you pay off your mortgage early, you may have to pay a fee. The amount varies, but it is usually a small percentage of the remaining balance or a few months' worths of interest payments.
Visit http://www.lendingtree.com/cec/yourhome/yourmortgage/mortgage-refinance.asp to learn more about mortgage refinancing and when it makes sense.
