Most people will tell you that right now, there has never been a better time to refinance. And, in most cases, refinancing is a fantastic idea. However, be sure you fully understand the conditions of your refinance-especially if you are doing it out of hardship.
Interest and the principal over thirty years
In the first years of your loan, you will be paying down interest. Mortgage amortization charts are quickly reveal to the smart homebuyer and refinancer that, once compounded interest has been stacked onto the principal of the loan, homeowners aren’t actual paying the principal of their loan off until 10 or 15 years into a 30 year loan. You are going to pay through the nose in interest if you refinance every few years when you see the next ultra-low interest rate, because you may be resetting the interest cycle and not paying down the principal.
If you can afford it, renegotiate some years off your loan instead. This reduces compound interest. Too, if you are feeling flush and can afford another lump sum payment, you can cut through the fat of interest payments and start calling your mortgage payments equity investments.
Add equity and save on your refinance through little fixes
Another smart way of putting equity in your home is through little fixes, like a coat of paint or even a new roof. An appraisal may determine that your house is worth more, which translates to more equity for you. The bank can rest easy that your home has made you more cash and that they have a solid investment and borrower.