Mortgage Refinancing is a modification of a mortgage loan
and changing the scheduled debt payments, usually to lower finance charges
and loan payments.
What's in it for you?
Mortgage Refinancing is a financial choice that allows
you to meet your needs:
·
You can take advantage of lower interest
rates or extend the period of repayment
·
You can switch to a fixed-rate loan from an
adjustable rate or from a balloon mortgage
·
You can take advantage of lower rates that
could shorten the term of your loan and you can pay off your mortgage faster
·
To pay off your other debts such as auto
loan or credit card, in most cases home mortgage is tax deductible.
When Does Mortgage Refinancing Makes sense?
Many homeowners decide to refinance when there is a
sudden change in financial circumstances. It estimates the break even point
(number of years you need to stay in your home after mortgage refinancing to
recover the costs).
For example, if you pay $2,500 in total to refinance and
chooses to reduce your monthly payment by $200,
it would take you 12 ½ years to recover all the costs.
Say you brought your house eight years ago. Borrowed
$125,000 at a 10% fixed rate for 30 years. Your monthly payments are $1,097.
You are re-financing your balance $120,718 at lower rate. Since you want to
be retired and living on 25 years, you chose a 25-year loan.
The table below shows that if you refinance at 9% your
monthly payment will go down to $1,013.
Years Left Loan Balance
9% 8% 7%
25 $120,718
$1,013 $932 $853
20 $113,673
$1,023 $951 $881
10 $83,012
$1,052 $1,007 $964
Today's Rate:
30- Year Fixed 5.93%
15- Year fixed 5.60%
Common rule of thumb: 2% rule - refinancing is a best
option for you if that would lower your mortgage interest by 2%. Your
decision such as how long you plan to stay or live at your home is one other
ultimate factor.
You need to consider losses of tax savings, as either you
will invest the money you saved each month.
When Mortgage Refinancing Is Not a Good Idea
If the break-even point fallen short and Mortgage
Refinancing costs you a lot. It may not be a better idea. Say you brought
your house eight years ago. Borrowed $125,000 at a 10% fixed rate for 30
years. Your loan rates have dropped since you are thinking of refinancing in
order to cut your monthly payments ($1,097). So your current balance for
your loan would be $120,718.
Let's say your creditor approves you for an 8% interest
rate, which reduced your monthly payment to $932. See table above. Not only
you save $165, estimated total closing costs will be $5,000. Another
scenario is when you have to transfer to another city within 2 years,
needing to sell your home. You might want to run the numbers to see if this
situation will get you to break-even point.
