When interest rates fall, homeowners rush to refinance mortgages, often without pauses to consider whether refinancing is a good idea or if it makes financial sense. Unfortunately, homeowners can easily lubricate the siren song with lower mortgage interest rates; However, the rates themselves are only a small part of the bigger picture.
What is Refinance?
A home loan is an original loan secured by a borrower to buy a home. A refinancing loan is a new loan from a borrower to pay off the original loan or, in the case of a serial refinancer, the loan repays the last refinanced loan. A refinanced loan is usually in the first position; However, it is also possible to refinance a home equity loan.
Types of refinancing mortgage loans
Just because you can currently pay a fixed rate mortgage does not mean that you cannot take out another type of mortgage when you refinance. However, before you consider changing your fixed-rate mortgage to another type, make sure you fully understand the terms of the new loan.
Here are the common types of mortgage loans you can consider:
- Just a mortgage.
- Adjustable-Rate Mortgage.
- Reverse Mortgages.
Mortgage refinancing costs
While it is possible to get a refinancing loan at no cost from your mortgage lender, remember that lenders are in the business of making money.
If the lender does not generate income by charging upfront costs to execute the loan, they are either paid into the loan or paid at an interest rate higher than the market.
There are several banks that turn into true loans at no cost, but they are few and far between. Read the fine print and compare the lenders. As of January 1, 2010, lenders were required to guarantee their estimates of good faith. If certain rates change at closing, the lender must pay.
The lender checks what we are in the business nickname “junk fees”, which means it can be arranged by the borrower. These fees are document preparation, administration, processing, application, etc. If you ask, the loan may be waived.
Benefits of refinancing
- Lower monthly payment. If you plan on staying in the house long enough to break even on refinancing costs, a lower interest rate and payment will result in higher monthly cash flows.
- Shortening the depreciation period. If your lower interest rate is significantly lower than your previous rate, you might want to consider shortening your loan term in exchange for slightly higher mortgage payments. Before you do this, figure out if you could invest that extra main part elsewhere for a better return.
- Cash in hand. Many get cash to invest at a higher rate of return than the new interest rate.