There are a number of potential benefits that you should know of when thinking to refinance your loan. In fact, refinancing is the best practice for saving money although the decision may affect your financial future if you do not learn more about the process.
Analyse different refinancing options
Refinancing is normally considered good for your finances, but a careful analysis of the different refinancing options is important to get real savings and not just extra problems.
Depending on your loan, the refinancing process may change drastically for you. When it comes to mortgages, remember that lenders generally charge fees on a point system ranging from 0 to 4 points, applied according to the credit worthiness of a borrower. Lenders apply this point system depending on their own criteria, sometimes the lower interest rate for a higher number of points.
Costs involved in refinancing
However, refinancing your loan involves other costs including points, processing fees, settlement fees, closing costs, etc. Refinancing plans are not real deals if these costs are not taken into consideration before applying for you can further increase your savings through reduce rates.
If your loan has adjustable rates, it is more susceptible to rate increases that you can lock in lower rates refinancing your loan. You can get additional benefits by selecting better terms, including fewer annual fees, or choosing a shorter loan period to reduce your payments and interest rates, and even merging your loan with another to save money on both.
Do not forget to check if your loan involves paying a prepayment penalty for refinancing the mortgage. Penalties can make any refinancing worthless if the penalty exceeds the expected savings.
Refinancing costs are similar to those you paid when you applied for the original loan. These costs include the whole application and approval process, including the application deposit to covers third-party costs, and the fee for searching the public record of ownership of your property and the title insurance policy that protects the lender for any loss due to discrepancies in the title.
When is refinancing beneficial
Refinancing is beneficial when interest rates have dropped at least 2 or more points since the time when you got your original mortgage.
Furthermore, if you paid an application fee when you applied for your loan and you were not approved the first time but later, sometimes up front fees are refundable and can be applied to refinancing.
Points to remember
Any benefit from refinancing will be useless if you are not planning to move in the next 3 years or so, because the closing costs will consume any savings from a lower interest rate. Before refinancing, consider what your reasons are for refinancing and how long you plan to stay in your home.
Moving ARM to a Fixed-rate
Although, sometimes you will be requested to pay a fee to have your property re-appraised, the benefits of refinancing include the ability of moving your actual adjustable-rate mortgage (ARM) to a Fixed-Rate. The inconvenience of ARM is that payments adjust with market changes in interest rates, while the rate on a fixed-rate mortgage stays the same for the entire term of the loan.
Another option to change your current ARM loan is getting another ARM for a better rate, term, and lower interest rate. Therefore, it is necessary for a careful comparison of your existing ARMs financial index, caps and rate with current market rates before refinancing to another type of ARM.
Tap into equity
Optionally, you can tap into equity, because you first started with monthly mortgage payments, used in part to pay interests, taxes, insurance, and your principal, which is helpful in building equity in your home, usually referred as "cash-out". Because mortgage interest is most of the times tax-deductible and you can use the cash-out to refinance the pay off debts with non-deductible interest costs.