Mortgage Refinancing Basics
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Mortgage Refinancing Basics
Understanding Mortgage Refinancing
Overview
While mortgages often have a 30-year term, most homeowners don't stick with the same loan for that duration. On average, Americans refinance their mortgages every four years, according to the Mortgage Bankers Association. Refinancing can result in significant savings over time, but it's crucial to weigh the short-term costs against the benefits before proceeding.
Why Refinance?
Here are some reasons you might consider refinancing your mortgage:
1. Securing a Lower Fixed Rate: If you initially secured a fixed-rate mortgage at higher interest rates, refinancing when rates drop can lead to substantial monthly savings. For instance, reducing the interest rate from 8% to 6% on a $150,000 mortgage can lower the monthly payment from $1,100 to less than $900.
2. Switching Mortgage Types: Adjustable-rate mortgages (ARMs) often start with lower interest rates but can fluctuate. If these changes are stressful or if rates are rising, switching to a fixed-rate mortgage might provide peace of mind with stable payments. Conversely, if you prefer lower payments and can handle rate changes, refinancing to an ARM might be beneficial.
3. Reducing Monthly Payments: Extending your mortgage term can decrease monthly payments, though it increases total interest over the loan's life. This could be a relief if you're struggling with current payments.
4. Accessing Home Equity: Cash-out refinancing allows you to borrow against your home equity for significant expenses. While this often offers lower interest rates compared to unsecured loans, if the new mortgage rate is higher than your current one, a home equity loan or line of credit might be more advantageous.
Is Refinancing Right for You?
Before refinancing, consider these factors:
1. Your Future Plans: If you plan to move soon, refinancing might not allow enough time to recoup costs. Typically, the longer you stay in your home, the more refinancing makes sense.
2. Current Mortgage Penalties: Some mortgages have penalties for early payoff. These fees can vary but typically consist of a small percentage of the balance or several months’ interest.
3. Costs of the New Mortgage: Refinancing involves various fees, including application, appraisal, origination, and insurance costs, which can add up. Lenders may also charge discount points for lower interest rates. Typically, refinancing is worthwhile if the new interest rate is at least half a percentage point lower than your current rate.
To explore more on mortgage refinancing and determine if it suits your situation, visit [LendingTree’s Resource](http://www.lendingtree.com/cec/yourhome/yourmortgage/mortgage-refinance.asp).
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