People who choose adjustable rate mortgages end up realizing that fluctuating lending rates can be a spanner in the works when it comes to budgeting. Worse still, if interest rates stay consistently high, they may be in danger of paying much more than they initially thought.
That is why when interest rates fall, it is a good idea to refinance your floating rate loan with a fixed rate mortgage to gain more time to repay and avail lower interest rates. Refinancing is a good option if you are paying variable monthly installments and wish for more consistent (and sometimes lower) payments.
What are your goals
Refinancing can help in increasing the cash flow for other purposes too. You can take a larger loan and may want to use the equity you own in your home to free up some cash to pay off a debt or renovate your home.
Lending rates are at quite low levels these days and now would certainly seem like a good time to opt out of a high interest mortgage. So, you may just be seeking a new refinance loan to save some money on monthly mortgage payments without indulging in extra expenditure.
Of course, these are all very valid reasons but consider carefully if these are sufficient to move to a different mortgage. For instance, if you are paying a high rate of interest but have only a year’s repayment left, it may not make sense to switch over at this point in time.
Work out the costs
The rule of thumb is that refinancing works when the rate of interest is at least 2% lower than your existing mortgage. However, a number of factors decide how profitable refinancing actually is. If you intend to stay indefinitely in your present home, you can opt for a refinanced mortgage at even just 1% lower than your current mortgage rate. If you get an extension on tenure for repayment, you will also benefit from reduced monthly payments. You can channel the saved money into investments to earn additionally.
Here’s where you will encounter your biggest problem – closing costs. The average closing costs (excluding insurance, prorated interest and taxes) on a $200,000 loan is estimated to be around $3000. So, if your monthly installment is lowered by $150, you will recover closing costs in about two years.
Every consumer’s financial situation is unique. What works for one person may not necessarily suit another. You should refinance only on the basis of sound research and evaluation of all available options, as well as the benefits and drawbacks that accompany them.