Info about Home Refinancing
Should you opt for home Refinancing?
Everyone buys homes and in almost all cases it is bought on a mortgage. What this means is that the lender will lend you the money based on which you can pay the builder and get the home. After that you need to repay the lender along with some interest. Home refinancing is an option where you can take a new loan to repay the older one and get a lower interest in the bargain.
Logically home refinancing seems like a simple and right thing to do all the time. However that is only in an ideal world. There are some factors that you need to consider while opting for refinancing. This really depends on how much are you really saving in the process.
When you refinance, you are basically applying for a new loan. So this involves processing your application, approving it and the whole process. This costs money and broker fees and other expenses. This is the primary point that needs to be studied well while thinking about refinancing.
The fees for processing the refinancing must be recovered in the shortest period, to make it a good financial decision. If you are not going to stay long in the house to recover that amount it is a poor decision.
To explain this better let us look at an example. Let us say that with your current mortgage you are paying $2000 per month to the lender. After refinancing the new lender says you would pay just $1800 per month but the process fee is $2000 to approve your loan. What this means is that you are saving $200 every month, but you have also paid $2000 more. So if you are not going to stay in that house for at least 10 months, you actually paid more with the refinancing.
Of course beyond the breakeven point every month you are saving $200 and that is a smart decision. So you always need to factor in the fees and your stay in the house while opting for refinancing.
The next thing to look at is the kind of interest rate the lender is offering. There are two kinds of interest rates: fixed and variable. The fixed rates are fixed for the duration of the mortgage. So if you have 10% fixed interest rate loan, it will remain the same till you repay it. On the other hand if you have a variable rate then it can get updated regularly. You could pay less than what you are paying today or more than that.
Given the flexibility, the variable loans when offered to new customers can be much lower than the fixed rates. However one year into the agreement and you could see a big hike in the rate. This is true not just for refinancing but also for your original home loan too. So you need to always compare apples to apples with regards it interest rates. Variable rates always seem better than fixed rates but they can fluctuate a lot. So in the long run you may actually end up paying more than fixed rate loans.
These are some points that you must consider while refinancing your home. Knowing these will help you make a sound decision.