Wondering when you should refinance a mortgage? You're not alone. Given the constant up-and-down cycle of our current real estate market values, fluxuating interest rates, predatory lenders and constantly changing rules and regulations it almost feels like the refi business is anybody's guess. And to top it off, it seems like every so-called real estate expert on the planet is saying, with utmost authority in their voices (or writing, since most of them make their millions by writing columns in magazines and newspapers), answering this dificult question: When should you refinance a mortgage?
Reasons To Refinance A Mortgage
There are several reasons why any home owner or real estate investor would consider refinancing a home loan. But it usually boils down to this: It makes financial sense.
For instance, if you're like most American home owners and only have one house (i.e. your "primary residence), and you stumble across a new mortgage vehicle that cuts your payments down, you'll probably seriously consider refinancing.
Or maybe you need some emergency cash and your home value is worth more than the remain mortgage principle? Often times you can "cash out" that equity with a home equity refinance. In this instance, you're basically borrowing the higher value of the home, but because the new loan is for more money than the one it replaced, the bank or lending institution gives you the money in cash. This is common amongst investors who want to leverage the value of their assets and even home owners who need money.
Still yet, maybe you purchased an "ARM" (Adustable Rate Mortgage) back when they were all the rage, and now you want to settle into a traditional mortgage. Refinances are common in these instances when people are screaming "Get me out of my ARM!"
When Should You Refinance A Mortgage?
It all depends on what your financial circumstances are. If you simply want lower monthly payments, chances are your best bet is when interest rates fall a point or two lower than your current mortgage. If you want to cash out some equity, you'll probably want to time your refi to your best estimate of the market price peak (when your home is worth the most money, thus making you eligible for more cash in hand).
Of course if you're a real estate investor you might have any number of criteria. No matter what your circumstances, it's best to speak with a mortgage professional and even an accountant for additional information about your particular situation.
Why Refinancing Must Be Handled Carefully
A properly timed refinance, combined with the appropriate new loan for your circumstances can help you reach your financial goals. But a poorly researched or haste-driven refinance could actually cost you more money than you'll save. Many people think they should refinance their mortgages when the interest rates drop below their current mortgage level, thus making for cheaper monthly payments.
What these people fail to realise is that most brokers charge a "closing cost" fee - which often totals into the thousands of dollars. So assuming you can save $50 per month off your monthly payment, but you pay $5,000 in costs, it will take several years before the payments savings offset the costs.
Another thing to keep in mind: Your home's current value. If you owe more than your home is worth, you'll probably have to come up with cash (or colateral) equal to the difference between the two. For instance, if your home's market value is $150,000, but your mortgage principle is $200,000, the bank or mortgage lender won't offer you a loan at the higher amount. That means you'll need to write a check (or take out another loan - gasp!) to cover the difference.
Tools For Refinancing Research
To ensure you get the best deal possible, make sure you do your homework. Understand the terminology, your financial situation and the market circumstances before making any decision.
How can you do this? While there's no substitute for expert advice, there are some great tools which can help you along the way.
Perhaps one of the most useful is a mortgage rate calculator. A mortgage calculator allows you to enter potential mortgage information and see what your payments will look like. You simply enter the mortgage amount, mortgage rate (or "mortgage interest rate") and mortgage term (length) and let it do its thing. The results will help you decide if you'll save money each month or not - but don't forget to factor in closing costs and other variables into your decision.
The next tool: A piece of notebook paper. Take a pencil and write "Refinance Home Mortgage" at the top, then write down every loan option, every variable and even every professional you talk to. Work out some figures by hand and see what you come up with. I personally find that computers are great for working complex numbers, but nothing gets the brain going like good old-fashioned paper and pencil. Besides, you can fold up the paper and take it with you whenever you speak with mortgage folks.
And finally: Your checkbook and bank account balance statements. Without knowing your personal finances inside and out, how can you make a secured financial decision that will impact your life for years - perhaps decades - to come? Before even thinking about refinancing, sit down and evaluate your monthly income, your savings and any other assets that could help if you need collateral. As you do this, think about what you can afford in terms of monthly payments. Then determine how much money you could offer up front for any closing fees or other associated charges. Once you've got those two numbers, you can decide if it's worth paying a large sum upfront for savings that might not materialize for years to come.
Refinancing a mortgage can be an excellent way to relieve financial overhead, liquify equity or even just optimize your finances based on other criteria - but only if it makes sense. By doing your homework, following good advice and using a little patience, you can answer the "When Should You Refinance A Mortgage" question for yourself.