With the economy having a favorable effect on interest rates, many homeowners are considering the viability of refinancing existing mortgages to take full advantage of this downward trend. Depending on which type of mortgage program the original loan was (fixed-rate loan, adjustable-rate, interest-only, or hybrid ARM), refinancing is proving to be a favorable option. Careful consideration needs to be applied to the feasibility of refinancing because each has an array of advantages and disadvantages. Whether the focus is on extending the loan term, cutting down on monthly payment amounts, or accessing the equity, there are both short-term and long-term benefits and consequences to be evaluated.
Lengthening the Term and Lowering Payments
Lowering the interest rate can be the primary focus, but it is not the only factor. It is important the borrower understands the complete package and ramifications of refinancing. This includes understanding that to extend a loan term means more overall interest is paid out in the long run and that the loan type chosen can decrease or increase monthly payments. There are other ‘hidden’ costs involved with refinancing as well, such as a reevaluation of tax liability, along with the property insurance coverage, and whether or not the new loan will require private mortgage insurance. Make use of online mortgage calculators to establish which refinancing scenario works best for your budget.
Factoring in Closing Costs
Another consideration are the refinancing closing costs. If a borrower is fortunate enough to refinance their old loan with the original lender by simply renegotiating loan terms, then the majority of closing costs may not be a factor. If that will not be the case, then the closing costs will become a major part of the equation. Typical closing costs can run from 3% to 5% of the loan value, which can be anywhere from $3,000 to $11,000 on a $200,000 loan, depending on how many points the lender chooses to apply to the loan package.