After hearing news about the Federal Reserve cutting down on rates or after realizing that the rates are significantly lower compared to the time you bought your home, it is really tempting to consider mortgage refinancing. At first look, it really makes sense. After all, who would not want to take advantage of low rates that mean lots of money saved on monthly fees?
However, the fact of the matter is not all homeowners will be able to save by simply taking a new loan just because the rates are low. It is important to know when to refinance your mortgage in order to know if the move is right for you.
In practical terms, you are refinancing only because you want to save. But you don’t usually see your savings right away. This is because there are fees involved when taking a new loan and penalties to pay for getting out of the old one. Here are the issues you should consider when deciding if it is the right time to take refinancing:
The amount of time you plan to stay in your home
If 30 of staying in a single house is long enough, extending it for few more years by taking another loan may not be that attractive. So, if you plan to move for the next couple of years or so, then, it is really not a good idea to take another loan. Remember that the only way to recoup the cost you paid for the new loan is by staying in your home for as long as possible. And if you don’t have any plan on doing this, let the current low rate pass.
The cost of terminating your current mortgage.
Paying off your mortgage early may carry penalty. This may include a small percentage of your outstanding balance, or several months’ worth of interest payments. While this may not be a large, it still adds up to the cost which you need to recoup later on.
The costs of the new mortgage.
The sound of “low rates equal savings” is very attractive, but on paper, it is a totally different story. Taking new mortgage means you have to pay several fees including appraisal, application, insurance and origination fees, as well as legal cost, another insurance, and title search which can all up to thousands of dollar. Securing a lower rate would also mean paying upfront for points. Remember that savings do not come free when refinancing. You have to take the first blows in order to reap the rewards later.
The cost of borrowing
Take note that lower rates doesn’t mean you will automatically get lower monthly payments, and thus, savings. Aside from rates, other factors that influence the amount of your mortgage are the length 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 don’t get the savings you’ve first expected.
Savings on tax deduction
Lower rate means lower mortgage interest. And lower mortgage interest means lower tax deduction. So savings after refinancing may not be as large as you think it is.
If you are considering refinancing your mortgage, think of these things and consult your financing and tax advisor over these matters to help you understand if it is really right for you.
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