Ought to I refinance my mortgage or pay further?

As mortgage rates continue to fluctuate at record lows, millions of homeowners are wondering if it's the right time to refinance.

Surprisingly, a lower rate is only part of the equation. Sometimes it is better to use the money on your main balance instead.

In other cases, however, you can only save the same amount of money by lowering your rate.

What is the best answer for you? Let's find out.

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Why refinance now??

When refinancing, you pay off the existing mortgage loan and replace it with a new one. The property that secures the mortgage remains the same; Only the interest rate and the terms of the new loan change.

You can refinance for a variety of reasons, including the following:

Reduce your interest expense. Reduce your payment. Shorten your loan term. Consolidate your debts. Change your loan type (i.e. convert this adjustable rate to a fixed rate). Drop your mortgage insurance

The answer to the question: "Should I refinance?" depends on what you want to achieve by repeating your mortgage and whether or not refinancing achieves that goal.

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When refinancing, this may not be a good idea

Refinancing is only a good idea if it does what you want it to do.

For example, if you need to lower your monthly payment by $ 100 to be able to afford your monthly expenses and can do this with refinancing, it probably makes sense.

However, if you try to lower your total mortgage costs and the refinancing increases those costs, you should probably pass.

Refinance or pay out? Use a calculator to make a decision

The easiest way to determine if refinancing is worthwhile for you is to use an online calculator. In this way you can tabulate your potential savings compared to the expected refinancing costs. This way you can see when you hit breakeven and how much you would save in the long run.

You can find such a calculator here: Refinancing calculator for mortgages

Take a look at an example of how a calculator can help you decide between refinancing and repaying your capital.

Suppose you plan to sell your house and move in four years. You think you want to refinance your $ 300,000 three-year, 30-year mortgage from a 4.00 percent interest rate to a 3.75 percent interest rate at a cost of $ 5,400. The mortgage calculator tells you:

Your current mortgage payment is $ 1,432. After three years, your remaining balance will be $ 283,496. At 3.75 percent, your new payment is $ 1,313, which is $ 119 less than your current payment

However, you always have to consider the cost of refinancing when deciding whether this makes sense.

Suppose you spent $ 5,400 on refinancing the closing costs. You'll save $ 119 a month on payments, or $ 5,712 over four years. If you wanted to move in four years, your savings just saved your refinancing expenses In two years, you saved just $ 2,856. In this case, you refinanced $ 2,544 into the hole

If your primary goal was to lower your payment, refinancing might make sense.

However, if you don't stay home long enough to break even, or if you want to avoid out-of-pocket closing costs, refinancing may not be the best choice.

You may also want to avoid refinancing if you have had your mortgage for a long time.

Remember that the refinancing of your loan starts on the first day. If you are 15 years on a 30 year mortgage, it may not be particularly attractive to start over for a new 30 year term.

>> relatives: How many times can you refinance your mortgage?

Choose the right refinancing for your goals

Remember that traditional 30-year refinancing is not your only option. There are different types of refinancing loans, and one may suit your needs better than the other.

Take the example above. If your goal was to lower mortgage costs during the four years you would like to stay in your house, 30-year fixed refinancing could be the wrong loan. For example, suppose you chose a 5/1 ARM at a five-year rate.

You could get this 3.75 percent interest free, which would cost you $ 3,243 in lost equity, but you'd pay $ 5,712 less in four years to save money and lower your payment by refinancing.

If you have a government-sponsored loan – including FHA, VA, and USDA – you should also consider the option of rationalized refinancing.

Optimized refinancing requires less paperwork, so the process is usually smoother and faster. You may also have reduced the closing costs.

Sometimes it just makes more sense to use your refinancing dollars to repay your principal.

For example, you could use the $ 5,400 closing cost to lower the credit balance to around $ 278,000. In four years, your remaining balance would be $ 251,200. That's over $ 10,000 less than refinancing.

And if you keep your loan for a lifetime, pay it out ten months earlier.

This is great if you want to pay less interest or repay your loan earlier. But you tried to reduce your payment. Can you lower your payment without refinancing?

Yes you can.

Re-amortization vs. Refinancing

Your loan service provider may be ready to repay your mortgage after your capital decrease. This is also referred to as "reallocation" of your home loan.

The lender takes your capital reduction and then recalculates your payment based on the remaining years of your home loan and the remaining balance.

In this case, your new payment is $ 1,405 per month.

Lenders have rules for overmolding. For one, you cannot do this with government-sponsored loans. And some lenders have minimum capital reductions that you need to make to qualify for a new casting. For example, $ 5,000 or ten percent of the credit balance.

There are also small upfront costs. Repaying your mortgage typically costs around $ 250.

One of the easiest ways to answer the question of whether refinancing is worthwhile is how long you want to live in your current home.

The less time you want to spend in your home, the less you normally benefit from refinancing.

However, it is important to note that, according to the National Association of Realtors, homeowners remain in their homes much longer these days.

It used to be six to seven years ago that the average US homeowner moved. Since 2008, however, the average term in office has increased to 10 years. Refinancing benefits may therefore become more likely.

Another important note. When homeowners stay in their homes longer, “serial refinancers” appear more often.

These people need to make sure that they make the best financial decisions based on their situation and not just get involved in the "I don't want to miss it" mindset.

Browse around to get the lowest refinancing rates

Today's mortgage rates are so low that refinancing may make sense to you now, even if it wasn't a year ago.

Contact several competing lenders to make sure you get the best deal.

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