Posted by Eric Evans on 7:32 AM with 3 comments
Record low interest rates have been all the talk in the news in the mortgage world. Homeowners are choosing to refinance and take advantage of huge cost savings while lowering their monthly mortgage payments. While this can be a good thing, one potential drawback is that every time a homeowner chooses to refinance and keep their original 30 year term, they are essential "starting over" on their mortgage.
Fortunately, most lenders will offer a loan term of 15, 20, and sometimes even 10 years. Thought the savings may not be apparent from the get go, the amount of money that can be saved over a long-term potential is quite significant. The common confusion lies in the fact that you might not see a substantial drop in monthly payments right after refinancing, but over the life of the loan you end up saving an enormous amount of money but paying off your mortgage earlier. With low interest rates, you could still be surprised how much your payment can drop from rates just a couple years ago.
It's important to inquire and make sure you qualify for refinancing before you determine what changes you would like to make to your loan term. Remember that when refinancing a home appraisal may be required and with changes in the market it could potentially appraise for less than it did just a few years ago. Besides the cost of a home appraisal there may be certain closing costs, some of which can be bundled into the new loan, but you may also want to consider paying out of pocket and keeping your loan amount lower.
Each refinance becomes a highly specific process and there are many different loan programs and options to cater to each individual need. Depending on when your home was bought, rates can vary, terms can vary, and the amount of equity that has accumulated varies among individual homeowners. It's best to talk to a lender or a licensed mortgage originator and have them run the numbers to see what option will best suit your needs.
If you determine that a mortgage with a lower term is ideal for you even if it requires a higher monthly payment, remember to recognize the trade-offs. You may be able to allocate more money toward your mortgage on a monthly basis with an eye toward paying it off quickly, but might you have to forgo home improvements, investments, or savings. On the other hand, if you already have plenty of savings or earning power to go toward these kinds of expenses, shortening your loan term could mean owning your home more quickly and eliminating your mortgage payment early, enabling you to devote your resources toward other expenditures or allowing you to build your savings for those golden years.
To learn more about your refinancing options and how they will affect your individual situation, check with your mortgage lender and see what options are available for you. Only you can determine what works best for your lifestyle.