Does it pay for me to refinance my house?
If you are thinking about refinancing your mortgage, it is important to know what you need or want out of your new mortgage. There are so many different options available that you really need to do your home work to know which plan best suits your needs.
There are of course many different reasons why homeowners will want to refinance their mortgage, in some cases it is to take advantage of low interest rates, consolidate 2 mortgages into one, looking to shorten the term of the loan to build home equity or to take out some cash to invest in a business or to even pay off other debts to name a few.
Does it Pay for Me to Refinance my House ?
Again you must ask your self why you want to refinance, remember that there are many things to consider first. Such as the current penalty fees you will be incurring for breaking your current mortgage contract, then there are closing costs, you may also have to take out mortgage insurance just to name a few things. All these charges and fees can add up to literally thousands of dollars in the long run.
So does it pay for me to refinance my house ? It will only be beneficial to refinance your mortgage if you plan on staying in your home for the long term. If you are planning to move within the next 5 years, you may want to reconsider refinancing, because the costs will surely outweigh the benefits. Remember that the banks set up mortgage terms in such a way that most of the interest is charges within the first few years of the mortgage. The borrower is essential paying interest only and hardly reducing the principal of the loan at the beginning of the term. This is usually with the first 5- 7 years of the loan, so if you want it to be beneficial , then you must not move in the near future.
Lets look at the main 4 options for refinancing a mortgage
These options include,
1. ) Low fixed rate loans,
2.) Cash-out or Cash back Refinancing
3.) Shorter-term Loan
4.) Longer-term Loan
Low Fixed Rate Loan
This is essentially when you want to take advantage of low interest rates due to a drop in the market , you may want to consider this option if you can reduce your current mortgage rates by at least 2 points, and you plan on staying in your home for at least another 5 years to make up for the refinance fees. You may also want to consider switching to a low fixed rate mortgage if you are currently in an ARM ( adjustable rate mortgage ) . You may opt for a 30 year fixed rate mortgage which will keep you locked in at current rate you refinanced at.
Cash-out or Cash back Refinancing
This when you are looking to take equity out of your home and put cash back in your pocket. In essence your are increasing your debt on the house in order to get the cash out now. However you will end up owing more on the house with this type of refinancing, which will increase your mortgage payments. Yet this may be a good idea if you plan of renovating to increase the home’s value.
Longer-term Loan
You may consider this type of refinancing if your mortgage payments are becoming more than you can currently handle. You can extend the term of the loan in order to reduce the mortgage payments. This has become a very popular move with homeowners in the past year due to the economic crisis in the housing market. Many homeowners have been looking for ways to prevent foreclosure by refinancing their mortgages.
Another option for extending the loan term is through a loan modification. This is for those who are already facing foreclosure and are in desperate need to reduce their mortgage payments to a more manageable level.
Shorter-term Loan
This is of course if you have a surplus in your finances and would like to reduce the term of the loan by paying off more in a shorter time. However even though this is a recognized option, if you are looking at reducing your term, you can simply increase your monthly payments when you have the extra money, and revert back to your regular payment when you want.
Another way to reduce your interest and pay off more principal is to open a mortgage merge account or money merge account. This is a type of account that allows you to merge with your mortgage. It works essentially like a regular bank account except that instead of depositing your pay check into a checking account and then making your mortgage payment at the end of the month, you will deposit that check directly into your mortgage.
Since mortgage interest rates are calculated on a daily basis, by putting money towards your mortgage during the month will actually reduce your principal slightly during that time month and in turn, lower your daily interest charges. The best thing about it is that you can withdraw funds for personal living expenses at any time. Yes your mortgage balance will go up again when funds are withdrawn , however your interest rates will have decreased for the time the money was actually in the account.
Merging your account with your mortgage is a practice that the banks certainly don’t want you to know about , however it is an option more and more people are beginning to discover.
Hopefully this article will help you to determine whether to refinance your mortgage or not.
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