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The current housing market has brought about an interest rate range that is very, very low. Naturally, many homeowners are tempted to refinance their mortgages to take advantage of this phenomenon. But, all mortgages are not created equal and not everyone's financial situation is the same. Refinancing, despite the low interest rates, is not always the right choice. While reducing and consolidating debt is usually a good reason, home equity loan refinancing for the purpose of buying luxury items (i. E. Cars, boats, vacations) can actually lead to hardship (an potentially a foreclosure).
by EddieLamb
The current housing market has brought about an interest rate range that is very, very low. Naturally, many homeowners are tempted to refinance their mortgages to take advantage of this phenomenon. But, all mortgages are not created equal and not everyone's financial situation is the same. Refinancing, despite the low interest rates, is not always the right choice. While reducing and consolidating debt is usually a good reason, home equity loan refinancing for the purpose of buying luxury items (i. E. Cars, boats, vacations) can actually lead to hardship (an potentially a foreclosure).
When faced with the option of refinancing, do the homework to find out if a home equity loan or refinance is right for you. The basic rule-of-thumb in the "refi" business is that it only makes sense if you can lower your interest rate by 2 or more percentage points. Another thing to look at is the closing costs versus the life of the loan. You must determine how long it will take to break even (paying off the closing costs) and ask yourself if you really plan to stay in your house that long. For most people, it takes roughly 3 years to break even.
The type of loan that you currently have should also factor into the equation. If your mortgage has an adjustable rate (adjustable-rate mortgage or ARM), you may want to switch to a fixed rate for the certainty of knowing what the monthly payment will be. Or, you may want to refinance to another ARM that offers protective features such as a payment cap or a better starting rate.
The total life of the loan should be taken into consideration. Some homeowners wish to build equity fast and want to switch to a short term loan to achieve this. Then there are people who want or need to do home improvements or pay for college tuition and they find that the equity in their homes will help them achieve this.
Read your current mortgage carefully before deciding to refinance. Some mortgages have penalties and fees associated with an early pay off (i. E. You will be charged a fine if you refinance). If these fines are high enough, it might not be worth while to refinance.
After deciding to refinance, it is then important to determine what type of refinancing or home loan meets your needs. The APR (annual- percentage-rate) and the type of loan (ARM or fixed) should factor in, but also other items should be considered:-The length of the loan. While short term home loans generally have a low interest rate, they usually have a higher monthly payment.
-Points (also known as origination or discount fees). These are fees charged by the lender or broker when the mortgage is signed. The most common equation is that one percent of the loan's value equals one point. While many mortgage companies offer a "zero point" or "no-cost" loan, these should be very seriously scrutinized because they usually turn out to be more expensive in the long run. When deciding to refinance or not, one should determine if paying the points can be justified when comparing them to the savings from a lowered interest rate.
There are two types of refinancing that a home owner can obtain: cash out refinance and a home equity loan. The cash out refinance is where you take out a new mortgage for an amount that exceeds the balance on your current loan. This will cause you to get cash back at closing. A home equity loan is a second mortgage on the equity of your home. Speed, cost, rate, and term should all be factored in when determining which type of refinance is right for you. Home equity loans are faster, have fewer fees, but usually have a higher APR. Home equity loans are also shorter in term and are more flexible. Consider all your options before settling on a mortgage.
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