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to FAQ's > |
| Should
I refinance? |
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most common reason for refinancing is to save
money. Saving money through refinancing can
be achieved in two ways: |
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1. |
By obtaining a lower
interest rate that causes one's monthly mortgage
payment to be reduced. |
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2. |
By reducing the term of the loan,
thus saving money over the life of the loan.
For example, refinancing from a 30-year loan
to a 15-year loan might result in higher monthly
payments, but the total of the payments made
during the life of the loan can be reduced significantly. |
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People
also refinance to convert their adjustable
loan to a fixed loan. The main reason behind
this type of refinance is to obtain the stability
and the security of a fixed loan. Fixed loans are
very popular when interest rates are low, whereas
adjustable loans tend to be more popular when rates
are higher. When rates are low, homeowners refinance
to lock in low rates. When rates are high, homeowners
prefer adjustable loans to obtain lower payments.
A third reason why homeowners refinance is to consolidate
debts and replace high-interest loans with a low-rate
mortgage. The loans being consolidated may include
second mortgages, credit lines, student loans, credit
cards, etc. In many cases, debt consolidation results
in tax savings, since consumers loans are not tax
deductible, while a mortgage loan is tax deductible.
The answer to the question "Should I refinance?"
is a complex one, since every situation is different
and no two homeowners are in the exact same situation.
Even the conventional wisdom of refinancing only when
you can save 2% on your mortgage is not really true.
If you are refinancing to save money on your monthly
payments, the following calculation is more appropriate
than the rule of 2%: |
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1. |
Calculate the total
cost of the refinance - example: $2,000 |
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2. |
Calculate the monthly savings
- example: $100/month |
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3. |
Divide the result in 1 by the
result in 2––in this case 2000/100
= 20 months. This shows the break-even time.
If you plan to live in the house for longer
than this period of time, it makes sense to
refinance. |
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Sometimes,
you do not have a choice––you are forced
to refinance. This happens when you have a loan
with a balloon provision, but with no conversion
option. In this case it is best to refinance a few
months before the balloon comes due.
Whatever you choose to do, consulting
with a seasoned mortgage professional can often
save you time and money. Make a few phone calls,
check out a few web sites, crunch on a few calculators
and spend some time to understand the options available
to you.
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