Do not think about refinancing your existing mortgage just because you see some opportunity. According to Paul Haarman, you must first evaluate whether it is beneficial to refinance your home and help you save money. Only when you consider the entire picture by comparing the benefits with the closing costs can you make a well-informed decision that goes in your favor. If you cannot do the arithmetic, consult a professional financial advisor (CPA) who can judge the situation currently and provide the proper guidance.
First, obtain the details from the new lenders about the loans they are offering and scrutinize the details so that you can choose one by comparing apples to apples. Next, evaluate the offer of the selected lender to understand how it stands in comparison to your existing loan. Identify the high points of the new loan and try to figure out the monetary and other benefits accompanying it. The cumulative benefits should point to the gains that you can derive by refinancing the existing loan.
Here are the points to consider when evaluating the new loan offer.
Focus on the interest rate, says Paul Haarman
You must set a target for yourself about the extent to which you want to lower the interest. It depends on the loan amount because the bigger is the amount higher is the impact of reduction, even due to a slight lowering of the rate. The picture is just the opposite when the amount is low, as it would require a higher reduction of interest to achieve equivalent gain. Finally, it boils down to the loan tenure and the total costs.
Reduced loan term
Often shortening the loan period is a reason for refinancing because it reduces the total cost of the loan even if the interest reduction is nominal or unchanged. Since the loan term is directly proportional to the interest rate, a fixed mortgage for 10 years entails lower interest payment even though the monthly payments might remain the same as that for a 30-year loan. Compare the numbers about the rates and monthly payments to ascertain the exact benefit.
Debt consolidation or cash out for home improvements
Sometimes home buyers think about refinancing as a measure for consolidating debts. Saving slightly on the interest rate might seem quite acceptable as the new loan serves a much important purpose of paying back some other loans. Along the same lines, homeowners can use the money from refinancing for home improvements. The decision depends on how well you can fulfill your objectives using the money available from refinancing, explains Paul Haarman.
Home value has gone up
Saving some money is the goal of most homeowners who opt for refinancing, and saving can happen in many ways. One of the best times to refinance your home is when the home equity appreciates to a level when you can avail of a new loan without incurring the cost of mortgage insurance. However, the home equity appreciation should be at least 20% to avail of the benefit of refinancing.
Exercise your options to weigh the benefits and choose one that helps to meet your objective of refinancing.