Homeowners who bought their home when mortgage rates were low may have no interest in refinancing their present loan. However, if you bought your home when rates were higher or have an adjustable rate loan you should consider refinancing to a loan that has more favorable terms and lower interest rates.
Refinancing is similar to the process you went through in obtaining the original mortgage. Simply put, refinancing a mortgage is essentially taking out a new mortgage. Many of the same procedures and the same types of costs are involved in the refinancing process.
Does Refinancing Improve Your Financial Picture
Generally refinancing can make sense if your current mortgage interest rate is at least 2 percentage points higher than the prevailing market rate. This figure is generally accepted as a safe margin when balancing the costs of refinancing your mortgage against the savings.
You should also consider how long you plan to stay in the house. Due to the costs associated with a refinance, it takes at least three years to fully realize the savings from refinancing to a lower interest rate. (Recouping your refinancing costs in a shorter time period depends on your particular circumstances and loan amount.)
Considerations to Refinancing
- To get out of a high interest rate loan to take advantage of lower rates. This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile.
- If you want to draw on the equity built up in the home to get cash for a major purchase or for your children’s education.
- If you have an Adjustable-Rate Mortgage (ARM) and want to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan through a fixed-rate loan.
- Would like to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps).
- Want to convert to a loan with a shorter term and build up equity.
If you decide that refinancing is not worth the costs, you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of a refinancing through your current lender.
Should You Refinance Your Adjustable Rate Mortgage (ARM)
- Is the next interest rate adjustment on your existing loan likely to substantially increase your monthly payments?
- Will the new interest rate be two or three percentage points higher than the prevailing rates currently offered for either fixed-rate loans or other ARMs?
- If your current mortgage sets a cap on your monthly payments, are these payments large enough to pay off your loan by the end of the original term?
- Will refinancing enable you to pay your loan in full by the end of the term?
If you are considering refinancing your home do not hesitate to contact Attorney John Tramontozzi at Tramontozzi Law Offices. He is a licensed real estate broker and experienced in the management of residential and commercial property. He will assist you in reviewing your current financial picture and offer considered advice and guidance regarding the refinancing process. Contact John Tramontozzi and the team at Tramontozzi Law Offices for a free initial consultation.