Mortgage loan interest rates have continued to hover around all time lows for the last year or more. With so many people looking to lower their payments to stay out of mortgage debt, refinancing can be a great solution. In general, there are a few tips for making refinancing successful.
The Right Step
If you are wanting to simply avoid foreclosure you may need to consider whether refinancing is the right option. Refinancing can lower your monthly payment, but can also cost you money out of pocket to obtain the new loan. One of the most overlooked aspects of refinancing is considering your “break even point”, which is the point at which the savings from refinancing is cancelled out by the costs associated with taking out the new loan. The general rule of thumb is that you should only refinance if the interest rate will be at least 1 percentage point or more lower than what you have on the current loan. This ensures that your savings over time outweighs the costs to take out the new loan.
Also, shop around for the best refinancing offer. Many lenders will boast “no closing cost” offers, but there is no such thing as a free loan. Typically, these offers refer to the fact that there are no upfront fees for refinancing, meaning that you won’t have to pay cash for closing the loan. Instead, the fees will be rolled into the loan or be compensated by a subsequent increase in interest rate, increasing your payment each month. It is important that you really understand the details of the new loan you are considering before refinancing. When you refinance you are creating an entirely new loan, which typically comes with a reset on your loan term. Therefore, if you have paid 10 years towards your current 30 year loan, those years will vanish and you will restart your refinanced 30 year loan at year one.