Any approach to refinancing mortgages needs to be timely, sensible, rational, and most importantly, affordable. While refinancing can certainly create great savings benefits in the long run, it must still balance itself out against time, effort, and costs involved. This is especially true when the bottom line is weighed against the long-term financial goals and the short-term practicalities for maintaining a sound household budget.
Interest Rate Factors
There is no factor more important when making a refinancing decision than interest rates. The refinancing interest rate determines the economic feasibility of the entire process, especially over the length of the loan term. If the current mortgage rates are at least two percentage points below the existing mortgage rate, then refinancing may be well worth the trouble and short-term expense, and could save the homeowner thousands of dollars over the term of the mortgage.
Calculate Monthly Savings
Having a lower interest rate is the most important factor in making a refinancing decision because of its significant lowering effect on your monthly mortgage payments. By reducing monthly mortgage payments by just $200, refinancing can save a homeowner over $24,000 in the first decade of the new loan, adding considerable flexibility to budgets for other debt obligations.
Evaluate Up-Front Costs
Since the refinance option is in reality a completely new loan, there will be initial costs involved that are almost identical to the original loan process, from the loan origination fees all the way to the closing costs. In some cases, to minimize up-front expenses, the closing costs can be added into the loan itself, although interest rates will now be added to the closing costs. In other scenarios, if the lender for the original loan is willing to discuss the refinancing effort, there might be reduced or eliminated expenses during the new loan’s closing process. If a borrower’s financial condition is in good standing, and their credit rating remains high, there may be additional terms or conditions the lender may adjust more favorably, such as even lower rates and points, or be willing to negotiate closing fees.