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Refinancing
When interest rates go down, you may want
to refinance your mortgage to get a lower rate.
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 Though some mortgages do turn out to be the lifetime commitment they seem to be when you're in
the middle of a closing, you may choose to refinance, or arrange
for a new mortgage at a lower rate or for a different term. With the new
money you borrow, you pay off the original mortgage.
Because interest rates change constantly, what seems like a good rate at
the time you buy may be much higher than typical rates just a few years
later. Refinancing can bring your housing expenses more in line with what
other people are paying.
Refinancing doesn't come cheaply, though. You often have to pay up-front
fees and closing costs again, even if your mortgage is only a few years
old. That's especially true when you switch lenders.
WHY
REFINANCE?You may want to refinance your mortgage for several
reasons:
- You can borrow at a lower interest
rate, which will reduce your monthly payments and often the overall
cost of the mortgage
- You
may want to consolidate outstanding debt — for example, by combining
a first and second mortgage into a single new one
- You
may want to reduce the term of your loan, which while it may increase
your monthly payment, will dramatically reduce your total cost
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But every situation
is different. To figure out whether you can save money by refinancing you
need to consider:
- How
much lower your monthly payments will be
- What
refinancing costs you must pay
- How long you plan to stay in your
home
- How
many years remain on your current mortgage
Your best bet is to tell the lender what you paid for
the house, what you still owe, and how much you're paying each month. Have
the lender itemize all the up-front expenses involved in the refinance and
estimate your new payments. Then you can figure when you will break even
and start saving.
For example, if you save $1,600 in mortgage payments each year by refinancing,
but it costs you $4,800 to refinance, you'll have to stay put more than
three years to realize any savings.
OTHER
CONSIDERATIONS If you've been paying your present mortgage for a number
of years, deciding whether or not to refinance is a little more complicated.
That's because you may have paid off a substantial part of the interest you owe on the loan and begun to chip away at the principal. When you refinance
— which means you're taking a new loan — the bulk of your monthly
payment once again goes toward interest.
A potential lender or real estate attorney should be able to help you compare
the combined total interest you'd owe if you refinanced with the amount
remaining on your existing mortgage. You can also use one of the refinancing
calculators you can find on most bank and financial services company websites.
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WEIGHING
YOUR CHOICES You can arrange refinancing to switch from a fixed-rate
loan to a loan with a lower rate, from an adjustable-rate loan to a fixed-rate
(something that may be attractive if rates seem headed up), or from a fixed-rate loan to one of the
hybrid adjustables, such as a 10-year fixed/20-year adjustable loan.
Refinancing moves in predictable patterns. A big drop in rates in the economy
at large or the introduction of a new strain of loans provokes a flurry
of activity, generally followed by a period of calm. Then the cycle may
begin again.
WHAT
IF YOU FALL BEHIND IN YOUR MORTGAGE PAYMENTS? Although lenders can foreclose your mortgage
and begin the process of repossessing your home if you're 90 days behind
in your payments, most will agree to less drastic measures. Some possible
solutions:
- Add
the amount you're behind to the end of the mortgage, which extends the
term and cost of the loan
- Renegotiate
with the lender to reduce each monthly payment and then pay the difference,
plus the amount you're behind, at the end of the mortgage
- Temporarily
reduce immediate payments and increase later ones, or make a balloon,
or one-time, payment to catch up
- Increase
future payments slightly until you've paid up the amount you're behind
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© 2006 by Lightbulb Press, Inc.
All Rights Reserved.
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