The major reason for refinancing is to reduce mortgage payments. When interest rates fall, homeowners can take advantage to reduce their monthly payment and, most importantly, the amount of interest they’ll pay over the life of their loan. Even a small drop in interest rates can result in large savings over time. For example, a decrease of 1 percentage point in interest on a $200,000 mortgage can save tens of thousands in interest on a 30-year loan.
Further, refinancing can enable homeowners to shorten their loan term in an effort to pay off their mortgage sooner. For instance, a borrower moving from a 30-year loan to a 15-year loan can pay off a large portion of interest, even if the monthly payments are a bit higher. This is especially appealing to those who want to own their home outright more quickly and build equity faster.
Refinancing can also be a chance to move out of an ARM to a fixed-rate mortgage, which offers greater stability in monthly payments. ARMs generally have lower initial rates than fixed-rate mortgages, but they can increase over time, which is less certain for the homeowner. With a fixed-rate mortgage, the interest rate remains the same for the life of the loan, making it easier to plan for monthly payments.
But that’s not the end of the story. Refinancing has costs associated with it, both upfront (closing fees, appraisal costs and so on) and ongoing (you’ll have to pay mortgage insurance if you don’t have a down payment of 20 per cent on your new loan), that can total several thousand dollars. You need to calculate how long it will take you to recoup these costs in the form of monthly savings. If you don’t plan to stay in the home long enough to recover your costs, don’t do it.
Having a mortgage advisor review your situation and help you weigh the costs and benefits involved in refinancing can help you get to know the process and make the right decision for your circumstances. A mortgage advisor can help you find the lowest closing costs, present the terms of your new loan so that you understand them, and make sure that refinancing makes sense in your financial situation.
