Factors To Consider Before Refinancing a Home Mortgage
February 15, 2010 by · Leave a Comment
In the world of refinancing a home mortgage there is a rule of thumb that states that refinancing is only a wise move if the interest rate can be lowered at least two percentage points (for example, from nine to seven percent). However other factors make a difference too when it comes to refinancing a home mortgage. How long will it take you to break even is a relevant concern as is how long you plan to live in your house. Refinancing a 2nd mortgage may appear to cause more negativity to your financial situation in the beginning and this is important to bear in mind.
While the stated annual percentage rate (APR) of a refinance mortgage is important, so are other things. Let us take a closer look at these other important refinancing variables.
The Term of the Refinance Mortgage
The term of the refinance mortgage is the span of time it will take to pay off both the principal of the loan as well as the interest on the loan. Be aware that short-term mortgages may have the advantage of lower interest rates but they will also come with higher monthly payments. Refinance interest rates must be low enough to make the refinance option a viable one for the homeowner.
Interest Rate Variability
Mortgages fall into two different camps- there are mortgages with fixed interest rates and those with variable rates (the rates will change after a certain length of time, such as anywhere from one year to five years). An adjustable-rate refinance mortgage (ARM) may seem like the better deal in comparison with a fixed rate mortgage that has a comparable term. However, when interest rates shoot up the rate for the ARM could rise as well. Discuss your options with the refinance lender and figure out what is the best deal for you at the present time.
Points
Also sometimes called discount fees or origination fees, points must be paid to the refinance lender once everything has been done in regards to refinancing your 2nd mortgage. Be aware that one point equals one percent of the value of the loan. Do an evaluation with your mortgage broker or lender to decide if the savings you could get from a lower refinance interest rate would be worth the points you would be expected to pay.
