most common reason for refinancing is to save money.
Saving money through refinancing can be achieved in
1. By obtaining a lower interest rate
that causes one's monthly mortgage payment to be reduced.
2. By reducing the term of the loan,
thus saving money over the life of the loan. For example,
refinancing from a 30-year loan to a 15-year loan might
result in higher monthly payments, but the total of
the payments made during the life of the loan can be
People also refinance to convert their adjustable
loan to a fixed loan. The main reason behind this type
of refinance is to obtain the stability and the security
of a fixed loan. Fixed loans are very popular when interest
rates are low, whereas adjustable loans tend to be more
popular when rates are higher. When rates are low, homeowners
refinance to lock in low rates. When rates are high,
homeowners prefer adjustable loans to obtain lower payments.
A third reason why homeowners refinance is to consolidate
debts and replace high-interest loans with a low-rate
mortgage. The loans being consolidated may include second
mortgages, credit lines, student loans, credit cards,
etc. In many cases, debt consolidation results in tax
savings, since consumers loans are not tax deductible,
while a mortgage loan is tax deductible.
The answer to the question "Should I refinance?"
is a complex one, since every situation is different
and no two homeowners are in the exact same situation.
Even the conventional wisdom of refinancing only when
you can save 2% on your mortgage is not really true.
If you are refinancing to save money on your monthly
payments, the following calculation is more appropriate
than the rule of 2%:
1. Calculate the total cost of the
2. Calculate the monthly savings––example:
3. Divide the result in 1 by the result
in 2––in this case 2000/100 = 20 months.
This shows the break-even time. If you plan to live
in the house for longer than this period of time, it
makes sense to refinance.
Sometimes, you do not have a choice––you
are forced to refinance. This happens when you have
a loan with a balloon provision, but with no conversion
option. In this case it is best to refinance a few months
before the balloon comes due.
Whatever you choose to do, consulting with a seasoned
mortgage professional can often save you time and money.
Make a few phone calls, check out a few web sites, crunch
on a few calculators and spend some time to understand
the options available to you.