Mortgage FAQ
2. Should I refinance?
The most common reason for refinancing is to save money. You can do this two ways through refinancing:
- By obtaining a lower interest rate that, causing your monthly mortgage payment to be reduced.
- By reducing the term of the loan, thereby saving money over the life of the loan. Refinancing from
a 30-year loan to a 15-year loan might result in higher monthly payments now, but the total of the
payments made during the life of the loan can be reduced significantly, saving money in the long run.
People also refinance to convert an adjustable loan to a fixed loan. This type of refinance provides the borrower
with the stability and security of a fixed loan. Because adjustable loans tend to be more popular when rates are
high, refinancing to a fixed loan is a popular move when interest rates go down. When mortgage rates are low,
homeowners refinance to lock in low rates. When mortgage rates are high, homeowners prefer an adjustable loan to
lower their payments.
Consolidating debts and replacing high-interest loans with a low-rate mortgage is another reason homeowners may opt
for refinancing. Consumer loans, such as second mortgages, credit lines, student loans, credit cards, etc., can be
consolidated for tax savings. Since consumer loans are not tax deductible, but a mortgage loan is tax deductible,
consolidating consumer debt and refinancing saves money with the lower interest rate and tax deduction.
The question "Should I refinance?" is a complex one, since every situation is different and no two homeowners are
in the exact same position. The conventional wisdom of refinancing only when you can save 2% on your mortgage does
not always apply. If you are refinancing to save money by lowering your monthly payments, the following calculation
is more appropriate than the rule of 2%:
- Calculate the total cost of the refinance--example: $2,000
- Calculate the monthly savings--example: $100/month
- 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.
Sometimes, you are forced to refinance. This can happen if you have a loan with a balloon provision, but no conversion
option. In this case, you should refinance a few months before the balloon comes due.
When determining whether or not to refinance, consult with an experienced mortgage professional. This simple
consultation will almost always save you time and money. Do your own research as well and make a few phone
calls, check out web sites, and crunch some numbers. Spend some time to understand the options available to
you, and find the option that will save you the most money.
