Would you like to increase your monthly cash flow? Or maybe your children
are nearing college and you're exploring options to finance their tuition?
When interest rates drop, homeowners who financed their homes under higher
rates often consider refinancing. The primary, tangible benefit of
refinancing under lower interest rates is that it lowers your monthly
payments -- sometimes significantly. In addition, refinancing can shorten
the term of your mortgage and help you build equity faster.
Because refinancing a mortgage means essentially taking out a new mortgage,
you'll encounter many of the same procedures the second time around. In
most cases, borrowers pay off their original mortgages first.
Should You Refinance?
When deciding if refinancing is right for you, there are several factors to
consider. Like the standard mortgage process, refinancing can be expensive
and time-consuming. Some mortgage experts suggest a rule of thumb that
refinancing is worth your while if the market interest rate is at least two
points lower than your current loan's rate.
Others recommend that you weigh the costs of refinancing versus your
monthly savings. Factors to consider include points, application and
attorney's fees, appraisals, changes in tax benefits, and prepayment
You also may want to consider how long you plan to stay in the house. Some
mortgage professionals advise that it generally takes at least three years
to fully realize the savings from a lower interest rate, given the costs of
refinancing. By following the above steps, you can determine how long it
will take you to break even and start saving money. If you may move in the
next couple of years, refinancing might cost you more than it will save you
in the long run.
Who Benefits From Refinancing?
Homeowners in a variety of situations can benefit from refinancing. If
you'd like to get out of a high-interest-rate loan to take advantage of
lower rates, refinancing may be a good option. In addition, you may want to
refinance if you're interested in trading in an adjustable-rate mortgage
for a fixed-rate mortgage to ensure that your payments will be set for the
life of the loan. Refinancing also can assist homeowners who want to
convert to an adjustable-rate mortgage with a lower interest rate or more
protective features. Other reasons to refinance include converting to a
loan with a shorter term in order to build equity faster. Or, if you'd like
to cash out your equity to use toward a major purchase, refinancing can do
the trick. Whatever your situation, your mortgage professional can guide
you through the refinancing process and discuss your options in greater