Refinancing - When Should You Refinance a Home Loan? [Home Financing]
November 26, 2007, 17:28:39

Refinance is a widely used technique may people use to obtain a new home mortgage loan for their homes and using the new amount of money to pay back a previous mortgage. By reading this article you will find out if refinancing is suitable for you and how to better take advantage of your refinancing.

Refinancing has some benefits, as it helps you cut your monthly payment. If the interest rate drops 2 percentage points, you should consider refinancing. But financial specialists recommend refinancing even if the interest rate drops by as much as half a point, if you plan to spend five years more in the house.

For example, let us assume you have a mortgage of $100,000 with the interest rate of 8.5%. If you take a second mortgage with an interest rate of 8%, you will save $35 per month, which means $420 per year. In the next five years, you will be saving $2,100. You can use this save money and invest it and your benefits can be even greater. You should consider all the aspects of taking a new mortgage between signing the agreement, especially the costs of refinancing and the effect restarting the mortgage clock has on you. For quick loans in the range of $100,000, the costs can be as high as $1,800.

You should divide your closing costs by your monthly payments to see how long it will take you to pay the money. If you consider the previous example, divide $1,800 by $180 and you get 10 months. If you do not intend to change your home for the next year, refinancing can be a viable option. You can choose a longer mortgage and invest the difference, or you can choose a shorter one (for 25 years, for example).

Another way to save some money is to stop paying private mortgage insurance, or PMI. You pay PMI, which is fact a sum of money for which you do not receive anything in return, if you have put down a small advance payment for your house (smaller than 20%).
You can escape the burden of PMI if your mortgage is 80% or less of your house’s value.

You can get a bigger mortgage loan compared to the previous one if you have built equity in your house. The equity represents the home’s current value, from which you extract the mortgage balance. By doing this, you get some extra money you can invest in other fields. However, be careful when adopting this solution, as it stretches out the payments. Being late with your mortgage is not the same with being late with the credit card. While you can usually negotiate with the bank your late payments on the credit card, being late with your mortgage can mean loosing your home.

Check with the bank and see if you can change the mortgage’s terms: you may be able, for example, to change to a fixed-rate mortgage or to shorten the term of your mortgage. There are so many options when it comes to home loans so be sure to explore all programs which might better fit your particular needs.

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