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financial matters

Monday, December 04, 2006

Home Refinance Dos

Refinancing your home mortgage can be a great decision- if it saves you money! A homeowner naturally would not refinance if a new mortgage cost him or her more money than it saved, but a good offer, and a quick decision without looking at the long term effect can be a detrimental action, and could actually cost the homeowner more than the original mortgage! Lenders are in the business of making more money, so don't expect all of them to be honest and do the future comparison for you.

So you are considering refinancing because you believe you can get a better monthly payment, a lower interest rate or a shorter term loan that you could pay off more quickly and own your home sooner than your original loan. These are all good reasons to refinance.

As a general rule, you should not refinance if the "safe margin" of balancing costs of refinancing against savings is less than two percentage points higher than the current market rate. You also need to determine how much longer you are going to be in the house. It takes about 3-5 years to realize the savings, given the costs, when you refinance.

Other factors that may make you want to refinance are getting a fixed rate loan as opposed to a variable rate, converting to an adjustable rate loan with more protective features such as lower cap rates, or remove cash from the equity built in your home.

Refinancing usually involves the homeowner to pay off the original mortgage, and sign for a new one with better conditions, whatever that may be for that specific homeowner. Keep in mind that there may be costs attributed to paying a mortgage off early, which are called prepayment penalties. If you are paying off your first mortgage early, the lenders may charge penalty fees which basically gives them their interest that would be paid if the mortgage were carried out for the life of the loan. You may be able to add the closing costs to the new mortgage and still have a smaller mortgage than the original one.

In order to decide if refinancing is right for you, you absolutely must compare the original loan and new loan based on the future! The future period should be how long you expect to keep the new loan. If the total costs of the new mortgage are less than the current mortgage, then, and only then would you refinance.

As in any mortgage, you must look at the annual percentage rate and fees. You have to make sure that the total costs of financing a new mortgage will be less than the total savings in interest. To cut refinancing costs, you may ask for no money upfront and then take a higher interest rate, leading to a higher monthly payment. But if it is still less than the current mortgage, you could definitely consider this as an option and not have to come up with a large upfront sum.

Always do your due diligence when considering financial changes. Be sure to have the lender disclose all information to you and leave nothing unclear. If you need help or clarification on information, ask for a professional for help! The use of a financial calculator can also be useful. If it has been a while since you have dealt in the mortgage industry, read up on new laws, current market rates and interest rates, and other pertinent information that allow you to be educated in the decision making process. There is a lot of information available to you, and make sure it is correct by running it by a trusted source.

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