In order to refinance mortgage rates, you need to know the benefits – and risks – involved in the process. Once you’re aware of these issues, they can easily be avoided, or taken advantage of, in order to save you thousands of dollars on your loan in the future. Keep reading to find out the most important things to know if you want to refinance mortgage rates. Be sure to also explore refinancing tips as well as our list of the top 10 mortgage refinance lenders.
Basics of Mortgage Rate Refinancing
After a set period of time, your mortgage may be able to be refinanced. If you are under a variable rate mortgage, then your mortgage could be refinanced after one, two, or five years. This is most effective when used to take advantage of a new, lower interest rate. However, as mentioned below, there is some risk involved which could wipe out, or even reverse, any gains that you make.
That being said, refinancing can save you thousands of dollars on unnecessary interest payments in the long term. As a good rule of thumb, consider refinancing only if the interest rate is more than two points lower than your current rate. If it isn’t, then refinancing your mortgage rate may not be in your best interest, as the length of time that you need to spend in your house before you ‘profit’ from your mortgage rate refinancing could be far longer than the amount of time you actually plan on spending in your house.
Put simply, in order to refinance mortgage rates, you need to be aware of the risks and benefits involved, as well as the amount of money you can afford to spend on a monthly payment, and the approximate length of time that you plan on spending in your house. If you know this information, then you could be able to save yourself a bundle of money by refinancing your mortgage as soon as possible.
Risks Associated with Refinancing Mortgage Rates
Just like anything in the financial world, there is a certain amount of risk involved in refinancing your mortgage. However, most of these risks can be avoided by simply staying informed on the terms of your loan. For example, many lenders have penalty clauses that will come into effect if you pay off your loan early, or even if you only pay off part of it. There are also thousands of dollars of taxes, brokerage fees, and many other payments that swiftly add up during the refinancing period. In addition, there may be closing fees, which, when combined with other penalty clauses, have the potential to wipe out any savings you got by refinancing your mortgage rate in the first place.
Another important risk that many borrowers do not realize is that, by lowering your monthly payment on the loan, you are likely increasing the total cost of the loan over your lifetime. The only way to change the principal amount is by paying off the loan, and interest is constantly accumulating. For that reason, a lower monthly payment does not always translate into a more cost-effective mortgage rate. The only time this would be the case was if you refinanced to receive a lower interest rate, or shortened the repayment time of the loan.
However, as mentioned above, the fees triggered by an early repayment could wipe out gains even from this kind of mortgage rate refinancing. For that reason, borrowers need to do their research in order to refinance mortgage rates in the manner which benefits them the most. If you put in your research time, and have educated yourself as much as possible, then you stand a good chance to gain from refinancing your mortgage rates.