Home Refinancing-Making The Right Choice

Homeowners it seems are forever on the lookout for ways to cut down on their bills. And home refinancing has become the method of choice for many. But be careful before you jump into any deal. There are times when refinancing can end up costing you more than you save on your monthly bills. Let’s begin by examining when a new loan makes sense.

If your current loan has an adjustable rate, this is probably a good time to look into refinancing to a fixed rate loan. Chances are you’ll save money. Adjustable rate loans can be good if you get the loan when the rates are high. But in the current rate environment it doesn’t make sense. It could mean thousands of dollars in your pocket over the duration of the loan if you can simply lock in a low rate. Interest rates always go back up. When they do, you’ll still be locked in at the current low rate.

Another good time to refinance is if you have a balloon payment that will be due soon, and you simply don’t have the funds available. Finally, if your current mortgage has a rate higher than the current market, then seriously look into refinancing. Even a savings of 0.25% can make a huge difference over the course of a 30 year loan.

Of course that all sound great but naturally there are some things to look out for as well. Carefully examine the closing costs. Refinancing is not free and some of the costs associated with it can be pretty significant. Once you know the costs, do some figuring to determine how long it will take to to recover that money from the savings you see each month.

All to often people move before their savings exceed what they spend in closing costs. This is just like burning money. If you might be moving soon, refinancing is probably not a wise decision. Plan on being in your current home at least long enough to get back what you spend.

Also look at the potential pre-payment penalties on your new loan. Most new loans will have them, and the average cost is 2-5 years. If you will be moving and need to take out a new loan, this will be an expensive problem. It’s also a problem if you want the loan to be paid off early. So be sure to determine those pre-payment penalties and again, measure them against your monthly savings.

Lastly, be sure to take a close look at your monthly payment. Even with a lower rate your payment could go up if you plan on taking advantage of a cash out option. Sure you’ll have more money in your pocket right now, but your new loan will now have a higher balance. So even at a lower interest rate your payment could go up. Of course if the new rate is much lower, your payment may be lower even with a higher balance. This is a good situation to be in. You’ll have cash in your pocket and be making lower monthly payments as well.

Clearly there are a lot of potential advantages to home refinancing. But doing it at the wrong time can be very costly. Make sure you check all the savings against the fees and the outside factors such as a potential move. If it all makes sense, shop around for a good lender. You’ll be surprised at how different their terms can be. Don’t be afraid to ask friends and relatives for recommendations.

Good decisions can be extremely beneficial to your financial well being.