Mortgage Refinancing
Time is both finite and fleeting. As such, we have a limited amount of time to do the things we wish to do, before the marginal value of making the right decisions decreases dramatically. Though it would be great if we could wait as long as it takes in order to make sure the best available decisions can be made, sometimes it is more important to get started and deal with the consequences when they occur.
This is especially true when it comes to getting loans. While it would be ideal if we could wait as long as it takes to make sure we get the best available rate possible, the value of buying our first home when we are one hundred years old is far less than the value of purchasing our first home in our thirties. We do not have the opportunity to wait decades for the best interest rate to come. Instead, we need to take the information that is available so that we can take the loan as soon as possible with the least financial repercussions.
But interest rates do change, and when they lower to below your current interest rate – enough below that the amount you save over the course of the loan is significant – you will no doubt want your loan to reflect that lower interest rate. That is where refinancing comes in.
What is Refinancing?
Refinancing a loan is when a lender (usually a new lender) purchases the total amount of the existing loan, providing you with the same amount owed at the current, lower interest rate. You can refinance multiple types of loans including, but not limited to:
- Home Loans (Mortgages)
- School Loans
- Secured and Unsecured Loans
However, refinancing home loans is by far the most common, as it represents one of the best ways to save thousands upon thousands of dollars over the course of your loan, simply by lowering your interest by a single percentage point.
Benefits of Refinancing
Refinancing has a variety of benefits that make it a great option for those looking to reduce the overall cost of owning a home. Some of these benefits include:
- Considerably Lower Monthly Payments – On a $300,000 30 year mortgage at an interest rate of 7%, you will be making monthly payments of $1995 per month – nearly $2000 each month. But if that interest rate is lowered to 6% APR, monthly payments drop all the way down to $1798. That is nearly $200 in savings per month.
- Considerably Lower Overall Payments – The higher your interest rate, the more you are paying for your home. Using the above example on a 30 year mortgage, you would have paid $718,200 over the course of your loan, whereas by simply lowering the interest rate by 1%, you pay $640,280 – a savings of almost $78,000.
Both of these are very beneficial. Not only do you save thousands of dollars over the course of your loan, but you also pay less every month, giving you additional spending money. Overall, if you can successfully refinance your mortgage, you can save a considerable sum of money.
Weaknesses of Refinancing
Refinancing does have a few drawbacks. The first drawback is that many mortgage lenders have a variety of fees and penalties for paying off loans early, specifically designed to ensure that you are less inclined to refinance with a new lender. Sometimes these fees can be fairly hefty, and ruin some of the benefits of completing the refinance.
Another lesser weakness is that refinancing will temporarily drop your credit score. Though it is known to have a “bounce back” effect that occurs after you have made a few payments, for a while your credit score may be lower than you deserve as credit bureaus look to ensure that your refinancing has not affected your financial status.
Finally, these benefits are significantly reduced if you expect to leave your home within a few years. Closing cost fees and other expenses for refinancing can completely reduce the financial benefits of refinancing – unless you expect to stay at your current location for an extended period of time.
Refinancing is a Something to Always Consider
You should always be on the lookout for the right time to refinance. While it is not advised to be constantly refinancing your loans each time your interest rates drop, should interest rates drop by a substantial margin and you plan on staying in the home for a while, there are a number of financial benefits to refinancing your mortgage loan.
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