Refinancing your mortgage is a lot of hard work, requiring an unbelievable amount of paperwork and patience. Nevertheless, if you shop around and take the time to thoroughly research your payment options, you can find the refinancing deal that will be extremely beneficial for your financial situation.
In recent years, interest rates have been quite low, and many mortgage holders are taking advantage of this to refinance their fixed rate mortgages so that they an pay less in monthly premiums, thereby freeing up more money in their monthly budget for other needs. With a good refinancing plan, people can save literally hundreds of dollars each month, which means saving thousands over the life of the loan.
If you have an adjustable-rate mortgage now, meaning that the interest rate fluctuates with the market interest rate, you might want to think about locking in today’s low interest rates by getting a fixed-rate mortgage when you refinance. That way, if interest rates go back up in the future, your premiums won’t follow suit! In case your old mortgage was bad credit loan which usually tend to have much higher interest rates, you will feel the difference tremendously.
If instead you have a balloon mortgage, then you’re in an entirely different situation. You know that big lump payment is waiting to be made in the future. You’ll need to either sell your property or refinance your mortgage before it’s due. If you’re facing this reality, don’t delay. Refinance your mortgage now to take advantage of the lower interest rates.
Whatever refinancing option you decide to pursue, be aware that you’ll have to cover the associated fees, which could be several thousand dollars. Be sure that the money you’ll save in lower premiums at least covers these mortgage refinancing costs.
The money you’ll ultimately save depends on how much time you live in the home after refinancing your mortgage. The longer you live there, the more monthly premiums you’ll have to pay. Assuming that the new premiums are lower, then the longer you live in the property, the more money you’ll save Obviously, the difference between the new and old interest rate also defines how much money you can expect to save. The math is simple. If you currently have a $1,500 monthly premium, but after refinancing it drops to $1,250 each month, then you’ll be saving $250 each month. Not bad!
The disadvantage of paying less for your mortgage each month is that you’ll have a lower deductible when you file your taxes. Be sure to factor this into your monthly budget, so that you save enough money each month to cover the increase in your tax payment. Continuing our example, if you are in a 30% tax bracket, instead of saving $250 each month you’ll actually save only $175, because 30% of those savings ($75) should be set aside for tax purposes.
You can divide your refinancing costs by the actual anticipated monthly savings to calculate when you’ll break even. In our scenario, if the refinancing costs are $4,500, your break-even point will be in 26 months ($4500/$175=26).