Mortgage Refinance Facts

Not every homeowner remains with the same mortgage loan for its entire term. Interest rates will most certainly change over the length of a 15, 20, or 30 year loan, and a homeowner would be wise to refinance his mortgage loan if rates drop. This can create substantial savings on interest over the life of a loan, so long as the homeowner educates himself on the potential benefits and pitfalls before deciding whether to refinance his mortgage.
There are several good reasons to refinance a mortgage. The most obvious is that, by paying off your current mortgage with one that has a lower interest rate, you will have lower monthly payments. Refinancing a fixed rate or an adjustable rate (ARM) loan one with the other can have a significant impact on your monthly mortgage obligation. Just remember that ARMs offer low initial interest rates that will change over time. Planning for this fluctuation can cause undue financial strain and it would be wise to seriously consider whether to refinance your mortgage with one that has a fixed rate. You can also build equity faster if you refinance your mortgage with a loan having a shorter term, as the shorter term translates to higher monthly payments that pay principal down faster. Shorter term loans also mean lower overall interest charges.
Savings will not be realized right away when you refinance your mortgage as you must still come up with the closing costs on your new mortgage loan. These costs may include application, origination, and appraisal fees, insurance premiums, title search fees and county clerk recording fees, and discount points paid upfront to secure a lower interest rate. Any initial savings will be offset by these fees unless your new interest rate is at least one half a percentage point lower than your current loan.
It is advisable to consider your long term plans before deciding to refinance your mortgage. You may not realize any savings if you plan to move within a few years. A refinance of your current mortgage makes financial sense only if you intend to remain in your home, as it may take several years to recover your closing costs. Check your credit score before deciding to refinance your mortgage. You may not qualify for the lowest rate available if your credit score is low and your debt to income ratio is high. Lenders tightened up their lending practices as a result of the 2008 and 2009 financial crisis, and what may have slipped by a couple of years ago could disqualify you now.

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