Despite the helpful information you may get from this website, there is really only one person who can decide whether or not you should refinance your mortgage. And that person is you. Many homeowners have benefited financially from a mortgage refinance, but whether or not it's the right thing to do depends on your own financial circumstances.
With that disclaimer out of the way, let's discuss some financial scenarios when mortgage refinancing makes sense.
Mortgage Refinance - Quick Definition
Before we talk about scenarios when it makes sense to refinance, let's briefly define what exactly a mortgage refinance is. Basically, refinancing takes place with you pay off your current mortgage with a new one.
At first this might seem pointless. After all, a mortgage is a mortgage, right? Wrong. The whole point of refinancing a mortgage is to take advantage of a better interest rate.
For example, if you have improved your credit score since your first mortgage loan, you would likely qualify for a better interest rate on a new mortgage loan. In such cases, you can pay off your old mortgage with a new one, and enjoy a lower interest rate on the new loan. This of course means you will pay a smaller mortgage each month. That's the primary goal of mortgage refinancing.
When to Refinance
Now that we understand what it means to refinance a mortgage, let's talk about scenarios when it makes sense to do so. As a general rule of thumb, it's probably a good time to refinance if the interest rate is two percentage points below your current rate. In such cases, the money you would save each month would certainly make up for the upfront costs of refinancing your mortgage (origination fees, etc.).
Another scenario might occur if your income has increased. If you are making more money than when you first took out your mortgage (and you can afford a higher mortgage payment), you could refinance the mortgage to shorten the term of your mortgage. If the current interest rate is lower for the shorter-term mortgage, it would make sense to refinance the mortgage. Oppositely, you might wish to make larger principal payments against your mortgage to pay it off sooner. These are all possibilities with a mortgage refinance.
A third (and common) refinancing scenario occurs when home buyers trade their adjustable-rate mortgage (ARM) for a fixed-rate mortgage. At the time of this writing, home foreclosures have gone way up. This is largely due to ARMs that are adjusting and catching the homeowners off guard with much higher interest rates. Many people in this scenario have refinanced for a fixed-rate mortgage. This strategy also allows the homeowner to lock in a more favorable rate for the life of the loan. No more surprises!
Using a Refinance Calculators
In every case of mortgage refinance, there is a certain "break even" point. This is the point, beyond which, it makes sense to refinance your mortgage. In other words, the money you save will exceed the money you pay to take on a new loan.
Mortgage refinance calculators can help you determine this break-even point by comparing your monthly savings (after refinancing) to the amount you would pay if you did not refinance. Most of these calculators also have helpful instructions and tips on when it would make sense to refinance.
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