When Refinancing Makes Sense?
Mortgage Refinancing is a process that involves taking out a new home loan to pay off an existing one. While done for a variety of reasons, refinancing is generally undertaken to reduce the interest rate, extend the term, and/or reduce the risk associated with an existing mortgage loan. The process of refinancing itself is very similar to that of getting a first mortgage. Essentially the same rules and eligibility criteria apply as you will need both a favorable credit rating and a low debt-to-income ratio just as would with an original mortgage.
The associated fees and costs are major points to consider when deciding whether or not to refinance. Average refinancing closing costs range between 2-3% of the loan amount not including points, application fees, origination fees, and title insurance. In general, expect a refi to run about 4-6% of the amount left on the balance of your existing mortgage. To realize the benefits of refinancing, a borrower must stay in his/her house long enough to recoup the costs of refinancing and “break even” This point is where the interest savings that realized covers the upfront costs of refinancing. The wider the spread is between your refinanced rate and your current rate, the shorter your break-even period.
Most established homeowners looking to refinancing, choose to do so with a 15- year loan as current rates are at extremely attractive levels. Last week, the national average for the 15-year fixed was reported at 4.29%, which is the lowest on record. The 30-year fixed also dropped last week to 4.78%, matching a record low set this past April. Unsurprisingly, recent demand amongst borrowers for 15-year mortgage options has been greater than that for 30-year mortgages.
While the monthly payment associated with a 15-year mortgage is higher, the money that you will save in interest alone versus a 30-year fixed can be significant. As with any mortgage option, be sure to meet with your lender or a mortgage professional to thoroughly discuss your options.
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