Most borrowers would consider refinancing their loans at some point in the life of their mortgage. Refinancing means getting another mortgage to pay off your current one. With the new mortgage, you’ll be able to change the terms into something more favorable to you.
There are many reasons for a borrower to refinance their loan. In most cases, people would refinance their loans to save money on interest. While others would refinance so they can extract their home equity and use it for paying the bills or for large purchases.
If you want to save as much money as possible on refinancing, you have to be smart about it. Here are some of the things you need to consider for a profitable refinancing:
Most people who decide to refinance do it to get better interest rates. It would be best if you end up paying less than the overall cost of your current loan.
There are several ways for you to have lower rates on your new mortgage. The first one is you need to make sure that you have a good credit score. Another method is to shorten the length of your loan. This is a good option only if you have a bigger income and you are certain that you can pay higher monthly payments. Experts advise to consider refinancing only if you can reduce your rates by at least 1 to 2%.
Another thing to consider is choosing a better type of interest rate. If you currently have a fixed-rate loan, it can be a good idea to switch to adjustable ones if the market rates are dropping or if you plan to move within the next few years.
On the contrary, if you have an adjustable-rate mortgage and worry about the rates going up, you can take a fixed-rate mortgage and stop getting concerned with the current market rates.
Another form of saving money by refinancing is to get the lowest monthly payments possible by having a longer term. It is a good idea if you need the money for other expenses or if you’re having trouble paying the bills at the moment. But keep in mind that you will have to pay more in total.
In other words, you’ll be extending the lifespan of your mortgage. For example, if you have already paid half of your current loan and have 10 more years left in the term, you can refinance so that you pay the remaining half in 30 years instead. You will have much lower monthly payments, but the interests can add up to a large sum of money.
As profitable as refinancing might be for you, you have to consider the concept of a break-even point. To refinance your loan, you will have to pay a certain sum of money for closing costs. This includes appraisal, application, processing and underwriting fees, etc. The closing costs can be as much as 2-5% of your principal loan.
The break-even point is the amount of time it will take for the money you save by refinancing to be equal with the money you paid for closing. This will usually take several years, which is why refinancing is not advisable if you are thinking about moving anytime soon.
Although some lenders offer loans with no closing costs, these usually come with higher interest rates. It is best to use our mortgage calculator to find the most advantageous option for you.