A home
mortgage refinancing (Refi)
loan is simply another mortgage you take on to
replace your old one, with the main difference
between the two being that in a refinance, the
property remains in your possession. You may
decide you want to refinance if you can find
another mortgage with a lower interest rate,
thus saving you money. Other reasons to
refinance include wanting to swap your volatile
ARM for a
fixed rate mortgage, or if you want to
pull out money from the equity you've accrued on
your home for major expenses like putting your
kids through college.
An old rule of
thumb, known as the 2 percent rule, states that
you should refinance if there is a 2 percent
difference between your current mortgage's
interest rate and the new loan's rate. The
reasoning behind this is that the larger the
difference between your current loan's interest
and that of the new loan, the more money you
will save, and the faster you will recoup your
refinancing charges.
Though the 2
percent rule is generally a good rule to follow,
it can sometimes be beneficial to refinance even
when the interest rate difference is smaller.
Even a 1 percent difference can save you a lot
of money, but it will just mean that that it
will take longer to recover the refinancing
costs. If you plan to stay in your home for a
while, this may not be a big deal, and you can
always refinance again if interest rates
continue to drop.
Typically,
home mortgage refinancing involves the same steps and
fees that were involved in obtaining the
original mortgage. You may even be able to
negotiate with the lender to get the refinancing
fees waived. Beware of lenders who advertise
"no-costs" refinancing, as it will usually be at
the expense of a higher interest rate.
Whether you
decide to
make a new home mortgage refinance or not will usually depend
on two factors: how much money you will save on
interest rates, and how long it will take you to
recoup refinancing costs. For example, if
refinancing costs you $3,000, and your monthly
savings are $150, it will take you 20 months to
break even. If you are not planning to stay in
your house that long, it wouldn't make sense to
refinance.
When does refinancing Make Sense?
