It is a commonly believed myth that refinancing a home is always to a person or family's advantage, regardless of their particular circumstances. In fact, this does not always prove to be the case. Although there are a number of benefits to refinancing your home, there can also be disadvantages, and all factors should be carefully considered when entertaining the idea of a mortgage refinance.
To better understand what refinancing is and involves, first consider a true definition of the word refinance. Refinancing is the practice of repaying money owed, using the resulting proceeds obtained from a new loan, while using the same property as the loan security. If there were not motivating factors to go through the necessary time and trouble, not to mention the paper work involved, no one would bother with this.
Yet there are a number of good reasons for doing this. The main one involves the constantly changing interest rates on the market. When interest rates drop significantly, the cost of your mortgage could be substantially reduced, if you are able to lock in this new, lower rate.
Even a decrease of only one half to three quarters of a single point can make a big difference in your monthly mortgage payment. In particular for those home owners who are tied to an ARM, or Adjustable Rate Mortgage, switching over to a fixed mortgage will allow them to not only capture the monthly savings associated with a lower rate, but to lock them in for the remainder of the life of the mortgage.
There are sometimes disadvantages for a home loan refinance, depending on the individual home owner's circumstances. If you will not stay in your home for at least another seven years, then the additional fees associated with the act of refinancing will likely end up costing you more than any savings that you will achieve in those next several years. This is particularly true if you currently have an ARM and are considering changing over to a fixed rate mortgage.
There are three ways to effectively refinance your home. In the first case, you might opt to roll your mortgage into a newer mortgage with a lower interest rate, saving money on your mortgage payments every month. In the second case, you might opt to change the term, or time frame, of your mortgage repayment. For example, if you currently have a fifteen or twenty year mortgage term, you could extend it to twenty or thirty years. In such a way, you would achieve lower monthly payments, but be paying more in total interest over the life of the loan.
In the third case, you might choose to reduce your monthly payments by changing over to an interest only loan. This type of loan only requires you to make monthly interest payments as a minimum, which can be helpful if you have planned expenses coming up, such as for weddings or college education bills.
In summary, there are times when it does, and other times when it does not turn out to be a good idea to refinance your home. The various elements impacting your decision will revolve around several things. These include the amount of time that you plan to stay in your home, how much equity value your home possesses, and whether or not the lower payments which result from refinancing your home are greater than the fees, closing costs, etc. This is a complicated matter best analyzed alongside a good mortgage company, who will be able to explain all of the particulars relevant to your individual situation.
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