There's little doubt that the current housing market and low interest rates present both challenges as well as opportunities for many homeowners
Consequently, home refinancing is a hot topic these days. Here's a quick exploration of some mortgage alternatives geared to saving you money.
Why Refinance?
First, the challenges facing homeowners. Decreased equity, falling income, adjusting rates and rising mortgage prices due to recent housing difficulties have put many homeowners under real pressure to reduce their expenses.
As property values fall in some hard-hit areas of the country, mortgage refinancing offers owners the solution to many pressing short-term difficulties:
- Lower monthly payments — If high monthly payments make it hard to meet financial goals, refinancing and extending the term of your loan can lessen your monthly expenses and save money in the short term. Of course, by extending the period of your loan, you'll pay more money in interest over the life of the loan.
- Save money on lower interest rates — By going from a 30-year to a 15-year or 10-year fixed rate mortgage, you can significantly lower the overall cost of your loan's interest, though typically your monthly payments will go up.
- Save money through a different type of loan — For those expecting to move soon, adjustable rate mortgages can offer money-saving lower rates initially. Payments may increase as the interest rate adjusts. Fixed rate mortgages offer a consistent level of monthly payments over time.
- "Cash-out" refinance — By refinancing for more than you owe on your current mortgage, homeowners can receive the difference as a cash payment. This is typically done for home improvements, paying for a child's college education or consolidating debts.
When refinancing your mortgage, you replace an existing mortgage with a new one, which means there are assorted costs to consider such as title insurance, escrow fees, lender fees, appraisal fees and other expenses require with any home financing.
The "2 Percent Rule" used to signal homeowners to refinance when they can reduce their rate by 2 percentage points. As rates lowered in the 1990s, many began advocating a "1 Percent Rule." But be aware that refinancing can cost between 3 and 6 percent of your outstanding loan, a substantial amount, especially if you have recently refinanced.
Why Not Refinance?
If you've had your mortgage for a long time (15 - 20 years) or you plan to move in the next few years, it might not be an ideal time. Another consideration is the prepayment penalty that some lenders charge if you pay off a loan early, including refinancing. Regions Bank offers several mortgage calculators to that help you evaluate your mortgage options and the decision whether or not to refinance your home.
Of course, there's another way. If you are leery of the higher payments on a 15-year fixed rate loan, consider paying extra principal each month on your existing 30-year fixed rate loan: adding $50 to a 30-year loan of $200,000 at 6 percent cuts the term by 3 years and saves you more than $27,000 in interest.
Ultimately, the issue of refinancing your home to save money depends on your short-term and long-term needs. For some, immediate budgeting goals will mean saving on monthly expenses now is more important than realizing savings over the lifetime of the loan. For others, saving money means saving money, period. Mortgage refinancing can meet both goals.
