Refinance Mortgage Loans

Refinance Mortgage Loans: Reasons to Refinance

When interest rates drop, the question of whether or not to refinance mortgage loans seems to be a clear “yes.” The process is not as simple as it may sound, however. Most homeowners do not realize they can actually end up losing money on the proposition.

Most people refinance to lock in a good interest rate, change an adjustable rate loan to a fixed one, withdraw equity in the home (in the form of cash), or to pay off their mortgage more quickly. Industry experts often quote a standard drop of 2 points or more for refinancing to make sense. However, that may not hold true for everyone. A small rate cut may pay off when owners take advantage of lenders who waive the refinancing charges like appraisal, application, or legal fees. To get the charges waived, homeowners can still expect a rate drop, but not as low as the “rock bottom.”

Keep in mind that to refinance mortgage loans, upfront closing costs are always involved. Over the long term, those fees should be recouped into savings on future payments and interest. If homeowners plan to stay in the home at least five more years, paying points (a percentage of the loan amount) and closing costs may pay off if the final interest rate gets dropped to the lowest it can go. Depending on the current loan, adding closing expenses to the new loan may still result in a lower interest and lower monthly payments.

Reasons Not to Refinance Mortgage Loans

Although homeowners may be itching to jump on the refinance bandwagon, they should consider that not everyone comes out ahead.

One reason is that some mortgages have prepayment penalties attached. If the current loan holder will not drop or waive those fees, money can be lost.

Secondly, owners who are 10 to 20 years into their 30 year mortgage could end up losing money. Where mortgage payments are predominantly applied against interest during the early years, by 20 years into the mortgage, a substantial portion is now going toward reducing the principal balance. Taking out a new loan may effectively reduce the equity built in the home, especially if the new mortgage is for more than the outstanding balance of the old mortgage. “Serial” refinancing, or refinancing three or more times, is a bad idea for that very reason.

Homeowners who plan to move within 3 to 5 years may not want to refinance mortgage loans. The closing costs could easily be more than what they would save in interest payments for those few years.

Additionally, homeowners who enjoy their tax breaks should take the IRS amortization schedule into consideration. If they pay points, the full amount may not be eligible for deduction. Check with a tax preparer to investigate the exact rules on refinancing.

One more point is worth considering before refinancing. If your credit score has drop significantly since the last time you applied for a mortgage, you may not be eligible for an interest rate that is lower than the one you already pay.

Calculators and Tips

To find out if the trouble to refinance mortgage loans is worth it, a lot of calculations are involved. However, many online calculators can help you simplify the process into merely plugging basic mortgage details into the correct boxes. Check out Smart Money’s worksheet for a starting point.

The Motley Fool also has good online calculators. Calculators are available that can estimate the closing costs and how much is saved in payments. The Foolish site reminds users that the results are future savings, when money is less valuable. The calculator can then convert the savings to today’s money for a more accurate comparison.

Another tip to remember is that while many websites may offer low rates and waived fees, it is important to check out other options for a refinanced loan. Current lenders may offer incentives to keep business at their institution. Call other lenders in the area to compare local rates. Consider using a mortgage broker who has an affiliated with the National Association of Mortgage Brokers.

If going it alone, make sure to ask about fees and hidden costs, and read the fine print carefully. Make sure the deal is one that saves you the most money in the long term.
[tag]refinancing,mortgage,loan[/tag]