Refinancing is a way of paying off your existing or current mortgage insurance in exchange for a new loan. Through this option, you will have the opportunity to choose a plan that has a lower interest rate. You can also shorten the term of payment.
To determine whether refinancing will benefit you or not, here are some of the things you should always remember:
Does It Offer Lower Interest Rate?
One of the main reasons people want to refinance their loan is because it offers lower interest rates. Reduced interest rates can help increase your home’s equity and allows you to save more money while paying the decreased size of your monthly payment. Ideally, 2% cutoff to your interest rate is more than enough.
Will It Shorten Your Loan’s Term?
A cutback on the interest rates will give you an opportunity to refinance some of your existing loan for another without changes in monthly obligations. For example, you have a 30-year fixed-rate mortgage on a $150,000 with a 9% interest rate. Through refinancing, you’ll be able to cut down not only the rate, but also the term of payment into half with only slight changes in your monthly payment.
What’s the Breakeven Cost?
Closing costs are basically the fee you’ll have to pay upon closing a real estate transaction. This can cost thousands of dollars. To find out whether the refinancing suits your current financial standing, calculate the break-even point or the time when the mortgage refinance will take place. However, if you don’t have plans on keeping the house even before the break-even period, is it much better for you to stay in your current mortgage plan.
Surely, refinancing is a good financial move if your aim is to reduce your monthly payment, shorten your loan’s term, and build up the equity of your home. However, you must carefully consider several factors first to determine whether refinancing will help you with your future plans or not.