by Guest Blogger: Peter Harper from http://www.moneyflipping.com
The real estate market has plunged drastically due to the economic crisis and is presently taking baby steps toward improvement. The interest rates are still at an all time low and a large number of people are trying to refinance mortgage. But is it a good idea to refinance your existing loan in today’s market? Well, if you follow the do’s and don’ts of refinancing, you can decide better. To know more, read on.
When to consider refinancing
In certain situations, mortgage refinance can turn out to be a good option. Some of them are listed below:
Lower interest rate: When you can’t afford to pay a higher interest rate, you can consider the option of refinance mortgage. To do so, you need to meet the required criteria of the lender.
Increase/decrease the term of the loan: Refinancing can be a good option to help you increase/decrease your loan term. You can, for example, refinance your 30 year mortgage into a 15 year loan and vice versa.
Normally, lowering the mortgage term is advised as it reduces the total interest costs that you pay over the loan term.
Changing the loan type: You can change your adjustable rate mortgage (ARM) into a fixed rate mortgage (FRM) and vice versa. In a FRM, your interest rate will remain same throughout the loan term whereas in ARM, the rate will change periodically, depending upon the market, after a certain period of time.
Cash out equity: If you have equity in your property, then you can cash it out and use it to pay off unsecured debts. To do so, you can contact your lender for refinance. Apart from this, refinance will also help you combine two existing loans into one.
When you shouldn’t refinance mortgage
Here are few things which will help you decide when not to refinance your mortgage:
Old mortgage: If you had a loan for a long time now and a large chunk of your payments are applied toward the principal amount, then it won’t be a good idea to refinance mortgage. If you refinance your loan at a later stage, you’ll start over the amortization process once again.
Prepayment penalty: Before you refinance your loan, you should check out whether or not you will be liable for paying a pre-payment penalty. This is a fee that lenders charge for paying off the mortgage before the loan term gets over. Thus, if you refinance, you will be liable for paying closing costs and pre-payment penalty which will increase your break-even period.
Sell off property: If you want to move away from the property and sell it off within the next 2-3 years, then refinance mortgage is not the option for you. Within this short term, you won’t be able to offset the closing costs that you pay while refinancing.
Hope the above mentioned points will help you decide whether or not you should refinance mortgage in the present situation.