Many of us will own homes somehow or rather in our lifetime. Unless you are very wealthy, you would probably have to take a mortgage loan for your property. With changing economy and your personal financial situation. It may make sense for you to do a mortgage refinancing periodically to cut cost and increase savings. There are several things to keep in mind before you commit yourself to it. First, even a small rate reduction can pay off quickly. That’s because there are many mortgage companies out there willing to waive the routine refinancing charges such as application, appraisal and legal fees. Which may add up to a couple of thousand dollars. Of course, in exchange for low or no up front costs, you’ll have to be willing to accept a rate that’s somewhat higher than the prevailing rock bottom.
Secondly, you can avoid laying out cash and still get a low rate by adding the points and closing costs to your new mortgage. If you’ve had your current mortgage for at least three years, you’ve probably reduced your balance by several thousand dollars. So you may be able to tack your closing costs onto your new loan and still end up with a mortgage that’s smaller than your original one — plus, of course, a lower rate and lower monthly payment.
Traditionally, the decision on whether or not to refinance has meant balancing the savings of a lower monthly payment against the costs of refinancing. However, in recent years, many companies out there have introduced “no cost” and low cost refinancing packages that minimize or completely eliminate the out-of-pocket expenses of refinancing. These refinancing packages compensate with a higher interest rate, or by including some of the costs in the amount that is financed.
As a rule of thumb the interest rate for your new mortgage should be about 2 percentage points below the rate of your current mortgage for refinancing to make sense. However, with the newer low cost or no money out of the pocket refinancing programs, it can be worth your while even if the reduction in interest rates is smaller than that. Nevertheless, you should also take into consideration how long you intend to stay in your present home as the month to month savings may not add up to the costs that are involved in a refinancing.
If your financial situation is not so favorable. You may want to consider lengthening your loan term to reduce the monthly payment. With your payments spread out over a longer time period, your installment will be smaller. The drawback to this approach is that because you will repay the mortgage principal more slowly, you may end up paying more interest overall.
On the other hand, you can reduce the total amount of interest you pay by shortening your loan term. With fewer monthly payments required to repay the loan, each payment will reduce the balance by a larger amount. As your balance decreases more rapidly, so will interest charges. Besides reducing your interest costs, a shorter loan term helps you build equity faster. That means you’ll have a growing source of wealth to draw from when you need it.