by
Carl Hampton
08/04/2006
The most common reason for refinancing is to
save money. Saving money through refinancing
can be achieved in two ways:
1. By obtaining a lower interest rate that
causes one's monthly mortgage payment to be
reduced.
2. By reducing the term of the loan, thus
saving money over the life of the loan. For
example, refinancing from a 30-year loan to
a 15-year loan might result in higher
monthly payments, but the total of the
payments made during the life of the loan
can be reduced significantly.
People also refinance to convert their
adjustable loan to a fixed loan. The main
reason behind this type of refinance is to
obtain the stability and the security of a
fixed loan. Fixed loans are very popular
when interest rates are low, whereas
adjustable loans tend to be more popular
when rates are higher. When rates are low,
homeowners refinance to lock in low rates.
When rates are high, homeowners prefer
adjustable loans to obtain lower payments.
A third reason why homeowners refinance is
to consolidate debts and replace
high-interest loans with a low-rate
mortgage. The loans being consolidated may
include second mortgages, credit lines,
student loans, credit cards, etc. In many
cases, debt consolidation results in tax
savings, since consumers loans are not tax
deductible, while a mortgage loan is tax
deductible.
The answer to the question "Should I
refinance?" is a complex one, since
every situation is different and no two
homeowners are in the exact same situation.
Even the conventional wisdom of refinancing
only when you can save 2% on your mortgage
is not really true. If you are refinancing
to save money on your monthly payments, the
following calculation is more appropriate
than the rule of 2%:
1. Calculate the total cost of the
refinance--example: $2,000
2. Calculate the monthly savings--example:
$100/month
3. Divide the result in 1 by the result in
2--in this case 2000/100 = 20 months. This
shows the break-even time. If you plan to
live in the house for longer than this
period of time, it makes sense to refinance.
Sometimes, you do not have a choice--you are
forced to refinance. This happens when you
have a loan with a balloon provision, but
with no conversion option. In this case it
is best to refinance a few months before the
balloon comes due. Whatever you choose to
do, consulting with a seasoned mortgage
professional can often save you time and
money. Make a few phone calls, check out a
few web sites, crunch on a few calculators
and spend some time to understand the
options available to you.
