With interest rates at an all-time low and the economy in its worst state since the Great Depression, many homeowners are asking the question “Should I refinance my mortgage?” The answer really depends on just how bad the interest rate on your existing home loan is. There are a number of issues to consider before jumping into refinancing a mortgage, such as additional loan fees that could eliminate any possible savings from the new loan.
For most people, refinancing a mortgage is not really the best option. It can be equally as exhausting as getting a brand new home loan, with thorough credit checks and financial documents required all over again. This is especially the case for those who still have credit problems, and in fact may even have secured less income and worse credit since their original mortgage.
However, in some cases the answer to the question “Should I refinance my mortgage?” should be yes. There are a number of mortgage and mortgage refinancing calculators available on the World Wide Web. One calculator came up with the following based on a hypothetical formula.
The hypothetical homeowner has $100,000 left on his mortgage, with 10 more years to pay it. The current mortgage interest rate is eight percent. The refinancing would lower the home loan interest rate to six percent, but require several fees including a loan origination percentage. The hypothetical fee of $2,500 and one percent loan origination fee may seem frightening at first, but a closer look at the savings causes the refinancing option to merit serious consideration.
It will take 34 months for the hypothetical homeowner to “break even” concerning the mortgage refinancing fees. However, his house payment goes down from $1,213 a month to $1,110 a month. The original amount of interest paid on the mortgage would have been $45,593 if the homeowner had not chosen to refinance his loan. With refinancing the mortgage, the interest paid is now $33,225. He will wind up saving close to $10,000 over the life of the loan – enough to fund two years of Individual Retirement Accounts (IRAs), pay for two years of state college for a child, buy a good used car, invest, or even take an extensive vacation.
However, this hypothetical formula assumes the homeowner has good credit and provable, stable income and assets such as savings accounts and IRAs. If this hypothetical person has a second mortgage, difficulty paying bills on time, and little equity in a fairly new home loan, the answer to the question “Should I refinance my mortgage?” should be a resounding no. The constant search for a willing lender, the possibility of eventually losing the home altogether, and the upfront costs may not be feasible for most people who live paycheck-to-paycheck.
Refinancing a mortgage is a smart option for those with the best of credit, equity in their home, and a good track record of responsibly saving and spending money. Otherwise, trying to refinance a home loan can do more harm than good and cause unnecessary stress.
