Should You Refinance Your Mortgage?

Should You Refinance Your Mortgage?

Whenever interest rates drop, the appeal of refinancing your mortgage increases. There are several reasons why homeowners choose to refinance their mortgages. These include locking in a favorable interest rate, withdrawing equity they have built up in their homes, or paying off their mortgage faster. If you can refinance your mortgage, it could be an excellent way of saving yourself a substantial amount of money.

Refinancing is basically replacing your existing mortgage loan with a new one. If you’re thinking about refinancing, there are some things you need to take into account first. For starters, consider the interest rate of your current mortgage and the current rate. When the rates have decreased two points, you’ll want to think about refinancing. Second, the type of loan you have should also influence your decision to refinance. If you have an adjustable rate mortgage, you may consider switching to a fixed-interest loan when refinancing. The third factor you need to consider is the length of time you plan to stay in your house. If you’re planning to sell your house in five years, you may not be able to save enough on refinancing to cover your costs.

The goal of refinancing is to save money over the long term. This can be done by refinancing with the same mortgage lender who originated your first mortgage loan. Since the lender already has your paperwork, there’s no need to repeat the process. In addition to that, you already have established a relationship so you won’t have trouble negotiating.

To assist you in deciding if refinancing your mortgage is right for you, here are a few steps to take:

1. Check for prepayment penalty on your current mortgage.

2. Gather several rate quotes from different mortgage lenders. For this, you will have to provide basic information about your debt, income and assets. This is to allow the mortgage lender to choose the loan package most appropriate for you.

3. Ask the mortgage lenders for the following data:

• length of the new loan;
• new monthly repayments;
• new interest rate;
• extra fees for setting up the new loan; and
• and the amount you will save over the term of your loan.

However, you must realize that there are certain drawbacks to refinancing your mortgage. The goal of refinancing is to save money over the long term, but in the immediate future it will cost you as there are closing fees and paperwork involved. In addition to this, the presence of a prepayment penalty in your current mortgage contract may cause you to lose money if you refinance. You can work around this by negotiating with your lender and asking them to waive the prepayment clause. Also, you won’t be able to deduct the full amount on this year’s tax return if you will be paying points on your new mortgage loan. You are required by the IRS to pay back the points over the life of the loan.

If you want to refinance your mortgage, you should take into account the information above. The decision to refinance is not something that should be taken lightly. The process may be a lengthy and costly one. But in the long run, you may find that the long-term savings you can accumulate will make up for the upfront costs associated with refinancing.