by Harriet Bond
(San Francisco, CA, USA)
Are you bogged down in debt & approaching bad credit?. Are your monthly home mortgage payments rising each year and getting harder and harder to pay? If this situation sounds familiar, you may have considered refinancing your mortgage. But, will it help?
When you refinance you’re simply taking out a new loan to pay off the existing one. It only makes sense to do this if you obtain a lower interest rate enabling you to save money.
Usually, there are two good times to refinance. If you have an adjustable rate mortgage (ARM) and you’re faced with a continual interest rate rise. You can refinance to obtain a fixed rate mortgage and avoid the higher payments.
Even if you already have a fixed rate mortgage, it might pay you to refinance if you can secure a lower interest rate. If you’re experiencing a cash flow problem and want to refinance to lower the payments by extending the term of your loan this is not a good reason. With an extended term you’ll be paying more over the years remaining that you own the home.
Calculate the cost of refinancing. It won’t come free you know. There are various fees such as points, application and recording fees, title search and PMI fees. Other closing costs you may have to pay aresurvey and appraisal charges.
You usually have to pay for private mortgage insurance (PMI) if theloan to value ratio is greater than 80% of the appraised value. It’s to your advantage to pay the loan down as soon as possible to avoid PMI.
A cash-out financing arrangement may be suitable if you’re disciplined on how you spend your extra money. A cash-out deal is when you refinance and borrow more than you owe. Pay off the existing mortgage and any excess money is yours to use however you wish such as paying off credit card debt.
If you make the decision to refinance, make sure you save enough to recover the cost. It could be just a break-even proposition. Usually, a good rule of thumb is not to refinance if you plan to move within five years. It probably will take at least that long to recoup the expenditures. Calculate this to be sure.
Use a refinancing loan calculator to determine if a new loan is feasible. Your lender will be happy to let you use theirs or you can access one on the Internet. They’re easy to use, just plug in the pertinent loan information
Remember that your refinanced mortgage will be secured by a lien on your home. If for some reason you’re unable to make payments the lender can foreclose and possibly sell your home to pay off the mortgage.
The decision to refinance should not be taken lightly. Examine each avenue thoroughly. Educate yourself on each step. Ask for advice. If the move is right, it could lift you out of debt and help make you a happy homeowner.