One thing many people may not consider is refinancing their home mortgage. When interest rates are low, refinancing is a good option. You may have been locked into, for example, an 8.5 percent home mortgage interest rate, but now you may be able to lock in at 6.75 percent. Shaving off nearly two percentage points can save you thousands in the long-run. Here are some basic ideas when considering a refinance on your home mortgage.
The first thing you want to do is see if the current interest rates are low enough to even make refinancing your home mortgage worth it. Providing the interest rates are low, find a mortgage lender willing to waive any refinancing fees such as application, appraisal and legal fees (which can add up to anywhere between $1,500 and $3,000). Of course, in exchange for low or no up-front costs, you will probably be locked into a higher interest rate than the current rock bottom rate.
If you are planning to stay in your home for at least three to five years, it makes sense to pay points (a point equals one percent of the loan amount) and closing costs to get locked into the lowest available home mortgage percentage rate. You can avoid paying out your own cash, and still get a low home mortgage interest rate, by adding your points and closing costs to you new mortgage. And this doesn't mean adding extra debt to the mortgage amount. If you have been in your home at least three years, you have most likely reduced your balance by several thousand dollars. You can simply add any closing costs to the new mortgage and still have a home mortgage payment smaller than before.
When you refinance your home mortgage, you typically pay off the old mortgage and sign a new loan. This may or may not be possible through the same lender. Check your current mortgage lender to see which refinancing options are available. If you decide to refinance, make sure you know of any penalties for paying off a loan early. The total expense for refinancing a home mortgage depends on the interest rate, number of points and other costs required to obtain a loan.
To obtain the lowest rate possible, most home mortgage companies will charge several points. The total cost can run between three and six percent of the total home mortgage loan. For example, on a $100,000 loan you may pay between $3,000 and $6,000 in fees and closing costs. Some home mortgage companies offer zero points, you just end up paying a higher interest rate.
With traditional refinancing, the general rule of thumb is to not refinance unless the interest rate is about two percentage points lower than your current rate. However, with low or no cost refinancing programs available, it can still be worth your while to refinance your home mortgage and obtain a smaller reduction in interest rates.
Determine how long you plan to stay in you home. If you will be moving in a couple of years, it may not be worth the time, money and hassle to go through the home mortgage refinance procedures. The month-to-month savings may never add up to the costs that may be involved in home mortgage refinancing.
By John Ivie