When is it Not a Good Idea to Refinance Your Mortgage? : 3CALoan
Refinance your mortgage is very tempting during rates fall. Home mortgage refinancing can sound quite attractive to homeowners, but it is not always a good idea. We will discuss all the situations when you should not consider refinancing.
Closing Costs are too High
It is necessary to pay a closing cost to the bank because they don’t write loans for free. Whether you pay them in a form of closing cost or you have a ’no closing cost loan,’ you pay them at the higher interest rate. Just because you pay closing costs isn’t a reason to consider refinancing. What is, though, is when the costs are so high that your break-even point is many years down the road. While there isn’t a specific number everyone aims for, typically a break-even point longer than 5 years is too much. You can figure out your break-even period by figuring out your monthly savings with the new loan. Let’s say you’ll save $200 per month by refinancing. You then divide the total closing costs by your monthly savings. Let’s say your closing costs are $4,000. Your break-even period would be 27 months. After 27 months, you would start realizing the savings from the new loan.
The Term Would Extend
When you refinance your mortgage, you often extend the amount of time you’ll repay your loan. For example, if you get a new 30-year loan, payments are calculated to last for the next 30 years. If your old loan only had 10 or 20 years left to go, home mortgage refinancing will result in higher lifetime interest payments. When you get a new loan, most of your payments go towards interest in the early years, and you’ll start from scratch. Plug the numbers into a “loan amortization calculator” to see how your total interest costs will change. If you want the new loan because you can lower your interest rate, that’s one thing, but consider trying to get a lower term. In this case, even a 25-year term would be good.
You Can’t Afford Your Debts
In some states, home loans have special protection from creditors. In the event of foreclosure, they may not be able to sue you if they lose money on the deal. However, home mortgage refinancing changes the nature of your loan: It’s no longer the original loan you used to purchase your home, so you may lose some protection.
Final Thoughts
Refinancing can be a good thing. It can save you money, lower your interest rate, or lower your term. But, you have to do it right. Think about the big picture. Are you actually saving after you pay your closing costs? Are the savings great enough? If you are trying to get yourself out of debt, but are unsure if you can leave your credit cards alone? These are the questions you must ask yourself to determine if you should leave your mortgage loan or take advantage of the lower rates/terms that are available.Feel free to contact us at (818) 322-5626 or (818) 3CA-Loan today! We will run you through the details of loans and hold your hand throughout the process.
Real Estate Blog DirectoryblogvilleiBegin
