Refinancing your mortgage makes sound financial sense when interest rates drop. However, before you enter into an agreement to refinance your mortgage, completely familiarize yourself with the loan terms so that you know what you are committing to. Educate yourself. The foreclosure crisis of the late 2000s dramatically illustrates the consequences of leaping before looking.
Homeowners refinance their mortgages for a number of reasons. One of the most popular reasons is to lock onto a more favorable interest rate when a current (adjustable rate) mortgage is about to reset. Other homeowners refinance a mortgage to access their home equity in order to finance home improvements or pay down debt. The homeowner benefits from this financial strategy at income tax time as mortgage interest is deductible, whereas interest on consumer loans (like credit card debt and home improvement loans) is not.
There are some homeowners who refinance a mortgage solely to shorten the repayment period. Monthly payments will rise, but the overall interest paid over the life of the loan will be less and the loan will be paid off sooner. Regardless of your reasons, carefully research potential mortgage products so that you enter into your new loan with your eyes wide open.
You should also seriously consider how long you plan to remain in your current home as part of your decision process. It typically takes about two years to recoup your loan closing costs from the savings realized from a lower monthly mortgage payment. Selling your home shortly after a mortgage refinance does not make sense.
Even though refinance of a mortgage does not involve a sale of the home involved, the loan process itself remains the same. You are still responsible for loan closing costs, which include application fees, title update and review charges, title insurance premiums, document processing fees, discount points, appraisal fees, attorney fees and county clerk filing and recording fees You either pay these costs upfront or add them onto the mortgage.
The refinance of your mortgage can be one of your smartest financial moves, provided you understand the terms of the loan and you intend to remain in your home long enough to recover your closing costs.