Can I Save Money if I Refinance My Mortgage?
To determine whether it makes sense to refinance, you need to evaluate your finances and your current mortgage loan situation. Two questions should quickly come to mind:
- Should I refinance my house loan?
- How much money can I save through mortgage refinancing?
There are no simple answers to these questions, because each individual's situation is unique. To figure out whether mortgage refinancing will save you money, help you accomplish your financial goals, and so you choose the right kind of refinance mortgage loan, you should consider your reasons for refinancing.
Reasons for Refinancing
- Lower your overall financial costs: Two ways to reduce overall financial costs is to lower your mortgage interest rate and to reduce the time frame on the refi loan, thereby paying less overall interest. The gains you achieve by reducing the interest rate must be weighed against the various costs involved in taking out a new loan.
- Pay down your principal balance faster: You can, in most cases, make accelerated payments on your current mortgage. However, by refinancing at a lower interest rate and/or shortening the term of the loan (e.g., from a loan with 18 years to a 10 or 15 year loan) you will not only cut overall costs, but will pay off your principal balance more quickly. If the value of your house doesn't drop, then either a lower mortgage interest rate or a longer loan term will help you build equity in your house faster.
- Improve cash flow/Problem with cash flow: If your current income is not covering all of your expenses or you are looking to increase more disposable income, then reducing the size of your mortgage payment is a good goal. Lowering your mortgage interest rate is not necessarily the most effective way to decrease your monthly payment. You can get a lower payment by extending the term of the loan or by changing the structure of the loan, for instance, refinancing your loan to one where you pay interest only for 5 years.
- Reduce risk in payment structure: If your current loan is an Adjustable Rate Mortgage (ARM), or contains a payment schedule with deferred payments such as interest only period or a balloon payment due, then you may wish to reduce your risk to those elements by locking into a fixed-rate loan.
- A Cash-out: You may have substantial equity in your home and want to take out money to make home improvements, buy a high ticket consumer product,or consolidate debt. One option is to refinance your current loan and then add on the additional sum you need in what is called a cash-out refinance. Using your home as collateral has its advantages and disadvantages and the decision should be made after careful deliberation. If you are considering a cash-out refinancing, think about other alternatives as well. You could shop for a home equity loan or home equity line of credit instead. Compare a home equity loan with a cash-out refinancing to see which is a better deal for you. Remember, though, that when you take out equity, you own less of your home. It will take time to rebuild your equity. This means that if you need to sell your home, you will not put as much money in your pocket after the sale.
- In trouble!: These troubles can include a difficult personal financial situation (e.g., poor credit score, large personal debt, inability to make payments on time) and/or a poor equity situation (your home is underwater or has a very high LTV). Your desire for home refinancing may be strong, in these circumstances, but you have fewer options.
Why is it so Hard to Determine if Refinancing is a Good Idea?
The refinancing decision is not an easy one. It involves making decisions regarding a substantial sum of money and a large number of variables/factors. To get the best mortgage refinancing deal you can takes a serious effort, you need to take time to gather the proper information.
In most cases you will be comparing house loans with different time frames. For instance, you current loan may have 24 years left on it and you may be comparing it to 30 year loans and 20 year loans. In some cases, you may be looking to combine two loans in order to refinance your home mortgage. refinance. Don't let these details confuse you. The tools and resources available at Bills.com will help you figure out if refinancing makes sense and help you find the best mortgage refinancing available.
The Refinance Calculator
We have introduced a refinance calculator that makes it easy to compare your current loan to the different refinance mortgage loans being offered. You can run different scenarios, so you can figure out the best loan for your needs.