Right after hearing news about the Federal Reserve minimizing rates or after realizing that the charges are significantly reduce compared to the time you purchased your home, it is really luring to consider mortgage refinancing. At first look, it really is practical. After all, who would not need to take advantage of low rates that mean lots of money saved on monthly fees
However, the fact of the issue is not all home owners will be able to save by simply taking a new loan just because the rates are usually low. It is important to know when to refinance your own mortgage in order to know if the move fits your needs.
In practical conditions, you are refinancing just because you want to save. But you don’t usually see your savings right away. It is because there are fees included when taking a new loan and penalties to fund getting out of the old one. Here are the issues you should look at when deciding if it is the right time to get refinancing:
The amount of time you plan to stay in your home
When 30 of staying in one house is long enough, stretching it for couple of more years through another loan may not be which attractive. So, if you are planning to move for the next couple of years or so, then, it is really not a good idea to take one more loan. Remember that the only way to recover the cost you covered the new loan is by staying in your home for as long as feasible. And if you don’t have any kind of plan on doing this, allow current low rate pass.
The cost of ending your current mortgage.
Settling your mortgage early may carry fee. This may include a little percentage of your exceptional balance, or a number of months’ worth of interest payments. While this may not be a large, still adds up to the cost which you need to recoup down the road.
The costs of the fresh mortgage.
The sound of “low prices equal savings” is very appealing, but on paper, this is a totally different story. Taking brand new mortgage means you spend several fees such as appraisal, application, insurance and also origination fees, in addition to legal cost, an additional insurance, and title search which can all up to thousands of dollar. Obtaining a lower rate would also mean paying upfront for items. Remember that savings are not designed free when re-financing. You have to take the very first blows in order to reap the rewards afterwards.
The cost of borrowing
Take note that lower charges doesn’t mean you will automatically get lower monthly payments, and thus, savings. Apart from rates, other factors which influence the amount of your own mortgage are the amount of loan, the type of loan (adjustable or fixed) the amount of points you have to pay upfront, and other fees included in the term. So don’t be surprised if you do not get the savings you have first expected.
Financial savings on tax deduction
Reduce rate means reduce mortgage interest. Minimizing mortgage interest signifies lower tax deduction. Thus savings after re-financing may not be as large as you think it is.
If you are considering replacing your mortgage, think about these things and talk to your financing and taxes advisor over these issues to help you understand if it is really right for you.