Some loan experts advise home refinancing as one way to lower the costs of your mortgage. According to the the Mortgage Bankers Association of America, home refinancing hit an all time in 2003 and continuous to enjoy huge popularity ever since.
It is true that refinancing your home loan can be a smart move but this depends on the situation. For instance, refinancing to reduce your fees can work to your advantage. On the other hand, refinancing just to have some cash to spend can be put you at great risk.
How Home Refinancing Works
Home refinancing is like taking out a second mortgage from your mortgage lender or from another lending company. For example, if your current mortgage has high interest rates because you had bad credit when your first signed up for the loan, you can take out a second mortgage with lower interest rates after you’ve made an improvement in your credit score.
Remember, refinancing your home loan would only work to your advantage if you can significantly reduce the interest rate. Ideally, you should save at least 2% or more from the current interest you’re paying. It is also important to consider the length of the repayment period left before you can complete your loan payments. If you only have a year or a few months left before your current mortgage is completed, then perhaps it would be more practical to stay in that loan and finish your payments instead of refinancing and prolonging your repayment period.
In addition, you should consider how long you intend to stay in the same home. If you have plans of selling the house, then there’s no need to refinance at all.
All Mortgages Are Not Created Equal
Different lending companies offer different terms and fees. Don’t just base your decision on the APR offered by the lender. Some loans may start out with very low rate but because it is a variable APR, the rate of interest can increase at any time in the middle of your repayment period. On the contrary, home loans with a fixed APR may have higher rates but you can be assured that the cost of your monthly payment will not change all throughout your loan’s term.
Also, watch out for loans with “zero points” or loans that do not require you to pay any down payment or “discount fees” since they could come with higher interest rates. Check the rest of the fees associated with your loan such as the administration fee, application fee, commitment fee, documentation charges, funding fees, processing fees, taxes, pre-payment penalty, appraisal, underwriting fee, and other costs.
Before refinancing your home loan, always consider the long term effects of your decision. Check the reputation and track record of the lending company you choose. Finally, after comparing lenders and choosing the one that offers the best deal, take the time to read your home loan contract and make sure that you agree with the terms and conditions of your lender.
About the Author
George Bents is a loan consultant with NewHorizon Finance and has been providing consumers and business owners with home loans financing since 1989. For years she has helped people with home loan problems especially pertaining to home mortgage loans and bad credit home loans.
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