There are many different ways to approach refinancing a home, and many tools and advice sources to help you. As with anything, though, there can be hidden hazards in the process. Knowing the following seven things about refinancing should help you avoid some of those pitfalls:
- Lower rates do not necessarily make refinancing opportunities pay off. There are generally fees and other costs associated with initiating a loan, so a slight drop in rates generally is not enough to justify refinancing a home. Before you pull the trigger, plug the closing costs you would face into a refinancing calculator to see if you would still come out ahead with the new loan.
- Pre-payment penalties can be a barrier to refinancing. Speaking of costs, there may be a potential trap in your current mortgage in the form of a pre-payment penalty. This is an added fee you would face if you repay the mortgage early, which includes refinancing. Those fees most often apply in the early years of a mortgage, and they might negate the economic advantage of refinancing. By the way, don't just check your existing loan for prepayment penalties. If you go ahead with refinancing, check your new loan terms for those penalties, because you may want to refinance again in the future.
- You may be able to refinance even if your loan is underwater. So far, 3.2 million homeowners have refinanced through HARP, a federal program which can facilitate refinancing an underwater loan. And all government loan programs have streamlined refinancing options that don't require an appraisal. The Federal Housing Finance Agency is urging home owners to look into the possibility before the program expires.
- Lowering your monthly payment can result in paying more over the life of the mortgage. Lengthening your remaining repayment period is a popular technique for lowering your monthly payment, and this may be your best source of relief if you are having trouble making those payments. However, stretching out the loan can cause you to pay more interest over the life of the loan, so you should look at an amortization schedule which shows the total interest expense before you decide to take this approach.
- Refinancing into the same type of mortgage is often not the best fit. For example, just because you got a 30-year mortgage last time does not mean you should necessarily refinance into the same thing. A shorter loan may be a better match with your remaining repayment period, and typically can help you get a lower interest rate and reduce your total interest expense.
- You should not limit yourself to your current lender. This might seem the most convenient approach to refinancing, but why make yourself into a captive audience when you might do better by shopping around? Especially when it's so easy to do online?
- Recent years have presented historically good refinancing opportunities. While millions of Americans have refinanced in recent years, the amazing thing is that not everybody in a position to benefit has done so yet. Lest you expect low interest rates to stick around forever, consider a little history based on figures from the Federal Reserve. 2014 will be the fifth consecutive year that 30-year fixed mortgage rates have averaged under five percent for the year; prior to 2010, that had never happened before. Historically, those rates have averaged a little over 8.5 percent, so the environment of the past few years is more rare than people may appreciate.
Refinancing a home has become so commonplace in recent years that it may have given homeowners the wrong impression. The fact is, under different circumstances, you could go the full length of a mortgage without getting an opportunity to refinance. So, when the opportunity does present itself, it is vital to make the most of it.