Refinance Mortgage
Many consumers refinance mortgage loans to take advantage of lower interest rates. Others refinance to take advantage of a cash-out program, which can provide cash in hand at closing. There are many reasons to refinance mortgage loans, but some consumers do not realize that refinancing is not always financially advantageous. Provided here is a basic guide to mortgage refinancing.
Costs
A refinance mortgage is rarely free. If costs are not charged up-front,
they are typically rolled into the total loan amount. Appraisal,
reconveyance, origination, points and administration fees are just a few of
the possible costs of a refinance mortgage.
Lenders must fully disclose the costs of a loan, but are not always inclined to specifically point them out. Ask your potential lender for a clear listing and explanation of every fee for which you will be responsible. Add up all of these costs and divide by the monthly savings that a refinance mortgage will provide. The result is the number of months it will take for you to recoup that investment.
Lengthening or Shortening Loan Term
Generally, a refinance loan is for a similar term as the original loan,
perhaps 30 years. However, the new loan starts the clock over. Therefore,
if you have been paying your original mortgage for 10 years, then you take
out a 30 year refinance mortgage, your total payment period will be 40
years. However, you can also take advantage of the cost savings to shorten
the loan period.
Changing Mortgage Type
Many people refinance in order to change a fixed rate mortgage to an
adjustable rate or vice versa, or perhaps switch to an interest-only or
other less common type of mortgage. This change can have a significant
impact on your financial picture, so it should never be undertaken without
the guidance of a financial professional.
Cash in Hand
Many people refinance in order to gain cash at closing. This can be an
excellent option, depending on what the cash is used for. Just keep in mind
that the cash amount is rolled into the cost of the loan, effectively
financing that cash over the life of the loan.
The Bottom Line
There is no right answer to the question of whether a refinance mortgage
makes sense. In order to determine whether it is right for you, it is
necessary to answer several basic questions. Determine your reasons for
refinancing, calculate how long it will take to recoup the costs, and seek
the advice of a financial professional. A bit of advance legwork can help
to prevent costly mistakes.
