If you're a homeowner, chances are you've heard about the wealth of riches to be made from refinancing your home. Falling, single-digit interest rates have made it possible for homeowners to slash their monthly bills in half and own their homes in half the time, allowing them to go out and buy a number or personal or material items and everything else they've ever wanted. Right? Well, not exactly.
Refinancing can reduce mortgage costs, in some cases dramatically, but careful planning and a close look at all the costs involved are necessary for prospective “refinancers”. Spectacular ads have attracted thousands and misled many as well. Savings aren't always as much as advertised, and hidden costs can take an unwary consumer by surprise.
Demand Is High
The new rush of refinancing has inundated the mortgage industry. Some estimates put three out of every four new loans going toward refinancing old mortgages. If rates continue to remain low, refinancing is going to claim more homeowners. Even if interest rates begin to nudge up a bit, analysts expect that this will cause people who have been cautious or just procrastinating to hurry up and get in on the refinancing train before interest rates turn up.
Points To Consider
The main problems of refinancing lie in the sometimes not so obvious charges and fees. Refinancing costs money. Financial institutions incur administrative costs for refinancing, such as document filing, loan committees, and employee labor, so they charge refinancers "points." A "point" is one percent of the total loan proceeds, say, $1,000 on a $100,000 loan. Points can either be paid up front, or can be incorporated into the loan itself, say, borrowing $101,000 instead of $100,000.
Title search, title insurance, a credit report, inspections, surveys and appraisals all must be dealt with and paid for when refinancing. In some states, there are also mortgage registration taxes. These costs, excluding the points, can run into several hundred or even thousands of dollars. Also, once a mortgage is refinanced, the tax savings are often less, and most refinancing costs are not deductible.
All of this aside, refinancing does make sense for many homeowners. If you're considering refinancing, there are a couple of things you should keep in mind. Consider not only what your interest rate is now, but also the kind of mortgage you currently hold. Also plan how long your refinancing will be for, the points and fees you will be charged, and how much interest you will save. Basically, your decision should be based on the up-front costs of refinancing versus the higher interest rates on your old loan.
Also realize that these costs vary from source to source. It pays to shop around on refinancing charges and points. Although some financial institutions are raising charges to deal with the refinancing traffic, many still offer good deals.
Many experts set forth the following conditions for people who are thinking of refinancing their mortgage: the new mortgage rate should generally be 2 points lower than the homeowner's existing mortgage rate; and the refinancing, points, and closing costs should be recoverable through the lower mortgage payments and tax benefits.
Some homeowners refinance their mortgages, but then, budget allowing, keep paying the same monthly amount that they have been on their old loan. They do not save money this way in the short-term, but they own their houses much sooner and save tremendous amounts of money in interest charges and from having their home paid off years sooner. Before you refinance, you should have a thorough review of your finances with your financial planner and accountant.
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