With mortgage loan interest rates still at historically low levels, refinancing your mortgage may seem at face value a wise financial move. Sometimes, refinancing does make sense from a financial perspective, but first, clarify your circumstances by identifying your motives for refinancing your home. In addition, consider all the ways refinancing affects you financially -- short term and long term.
ARM to a Fixed-Rate Mortgage
If you plan to stay in your home for a few years, and have an adjustable rate mortgage, refinancing to a fixed-rate mortgage could work to your advantage. However, avoid making the move based on the perception that an ARM means you should expect bad news at some point during the term of the loan. Check the ARM's index and find out the frequency of the loan's rate adjustments. Also, identify the first, annual, and lifetime caps on the loan. Once you have this information, compare the numbers. If you benefit financially with a fixed rate mortgage, by all means, make the move.
Save the Down Payment for a New Home
Before making the decision to refinance your home mortgage to save money for a down payment on your next home, perform some basic calculations. First, find out how much how much the refinance will cost. This includes any penalties for paying off the current mortgage. Next, determine your breakeven point. For example, you pay a total $6,900 to refinance and you reduce your current mortgage payment by $287.00 per month. It will take you about 24 months to breakeven - $6,900 /$287 = 24. The conclusion, you must stay in your current home at least two years before you can actually start saving money.
Refinance into a Longer Term Loan
On the surface, low interest rate loans always look more attractive because you can save cash on your current payments. However, failure to consider all the costs of refinancing to a low interest rate mortgage over a longer term could mean you end up paying more interest. Let us say you have 15 years left on your current mortgage and decide to refinance into a new 30-year fixed rate loan. Even with lower monthly mortgage payments, you could end up paying tens of thousand of dollars in additional interest payments.
Refinance to Take Advantage of a No-Cost Loan
Forget the myth of a “no-cost refinance.” You will pay the cost of refinancing; it is only a matter of the mortgage lender's presentation. Pay the cash upfront from your funds; refinance the cost into the loan and have a larger principal; or the lender pays the cost and you pay a higher interest rate. Look at each option. Make a comparison of the monthly mortgage payment for each choice. Then, decide what terms and conditions work best for you.
Refinance to Consolidate Debts
Think twice before refinancing your home mortgage to eliminate high interest rate debt. It seems reasonable to grab a low interest rate mortgage, to pay off those high interest rate credit cards, but making this move could portend a financial disaster. Moving unsecure debt, such as credit cards, medical bills or department store cards, into secured debt puts you at risk of losing your home. You put your home up as collateral. Consider the worse case -- what if you become unemployed and cannot make the monthly loan payments. You may lose your home.
Refinance to Take Cash Out for Investing
Low interest rates plus a hot stock market seems like the perfect opportunity to make some extra cash. Just refinance to a low interest rate mortgage; pull some cash out of your home, and invest the money. If you have the shrewdness and discipline of a seasoned investor this move could work out in your favor. One misstep and this could end up costing you money in many ways. Think about the different elements involved in this strategy: the interest rate on the mortgage; potential risk of the investment; real estate tax consequences; return on the investment; and the tax consequences of the investment. It can work, but it takes investment knowledge and skills to pull this one off successfully.
Refinance to Reduce Mortgage Payments
The cost of refinancing a home mortgage can cost you anywhere from three to six percent of the mortgage. In addition, you will make more payment to the lender if you have 23 years remaining on a 30-year mortgage and choose to refinance into a new 30-year fixed rate mortgage. You may have lower monthly mortgage payments, but you also picked up an additional seven years of mortgage loan payments. Again, make sure you go to your trusted mortgage calculator and run the numbers. Make the necessary comparisons so that you can make an intelligent decision.