With interest rates continuing to tumble in the United States, many homeowners are finding themselves in the market to refinance their homes.
What does that mean?
Essentially, refinancing your mortgage means you pay off your existing loan and replace it with a new one. The obvious benefits for doing so include:
- Saving money on interest payments by securing a new, lower interest rate
- Reducing or adjusting the overall duration of the loan (i.e. reducing from a 30-year mortgage to a 15-year mortgage, perhaps)
- Converting from an adjustable rate mortgage (where the interest rate fluctuates) to a new, fixed-rate loan
- Potentially obtaining a home equity loan
For these reasons, many homeowners have recently taken advantage of the recent interest rate cuts and have field their applications to refinance their existing mortgages.
However, before you race over to your local mortgage broker, be sure to make sure if refinancing actually makes sense for you and your current situation.
A few things to consider:
- Refinancing your home isn’t free. In fact, refinancing typically costs a homeowner in more ways than one. For starters, refinancing requires an appraisal and application fees similar to those that you paid for your initial mortgage. Additionally, refinancing can cost around 3-6% of the mortgage’s principal amount.
- How long will you be in your current home? It can take several years to recoup the costs of refinancing, so be sure to truly consider how long you plan to remain in your home. If you plan to stay long enough to benefit from the potentially reduced mortgage payments as well as the refinancing costs, it may be worthwhile to refinance.
- Does refinancing fit within your budget? If you have the ability to afford the costs associated with refinancing, it may be worthwhile to consider. However, prior to signing on the dotted line, be sure to work with a mortgage broker who can help you understand the new impact to your monthly mortgage payments, the estimated amount of interest you’d save over time, and how long it may take you to recoup the costs associated with refinancing.
- As a general “rule of thumb”, if refinancing your mortgage would save you 2% or more on your interest rate, it can make sense to start the process.
Curious how you can get started refinancing or what the current available offers look like? Take a visit to Bankrate.com and explore. If refinancing would allow you to reduce your overall interest expense and potentially shorten your overall mortgage, it may be a wise decision to consider.
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