In today’s world of tight credit standards, government confusion, and record-low interest rates, it is beneficial to every homeowner, regardless of status, wealth, or property type, to know the home refinancing basics.
Homeowners all across America as well as many other countries are clamoring to take advantage of these low interest rates, and in order for them to be successful, they should consider three factors:
- Refinancing only makes sense if the long term savings outweigh the cost of refinancing.
- Homeowners should be very thorough in researching and selecting the best loan option.
- The choice of financial institution is important.
Refinancing a home involves certain costs, also called “points,” “origination fees,” or “discount fees.” When considering whether to refinance, it is vital that points and fees be taken into consideration. The short term cost (or long term if a “zero point loan” that builds the cost into the new loan,) must be balanced with the anticipated savings, eventually leading to a calculation of how long one must own the house to make up for the costs and realize a savings.
If, for example, a refinance would lower the monthly mortgage payment by $100 and the points on the loan amount to $3,000, the homeowner would need to keep the home for 30 months before the refinance would start netting a savings.
After the mortgage crisis and mass defaults on sub-prime mortgages, it is more important than ever to research what type of loan to refinance into, specifically the term of the loan and the type of interest rate. Mortgages over a shorter term for example 15 years versus 30 years, have a much higher monthly payment but result in a substantially lower total cost of borrowing (interest.) Long-term mortgages have the reverse effect.
Loan variability means choosing between a fixed interest rate that is unchanging for the life of the loan or a variable rate, of which there are many varieties, with rates that change at certain points during the life of the loan. Each type has its own pros and cons.
As far as choosing which financial institution to utilize, the most important factor is to shop around. The holder of your current mortgage may offer a great savings of time in that they already have much of the necessary information and potentially also a monetary savings as a reward for loyal customers. Another option is to ask for referrals from your trusted real estate agent ~ they work with lenders every day… it’s more important to have a trusted adviser than to have an offer of ¼ point less from an “unknown” in another state.
There are nearly infinite banks and mortgage companies worth exploring, and only after researching the institutions as well as the above enumerated considerations of total savings and mortgage type can a truly informed decision be made.
Author Jeff Hammerberg is the Founding CEO of www.GayRealEstate.com ~ The Nation’s Largest Free Directory of Gay, Lesbian and Gay Friendly Realtors offering Free Buyers Representation, Free Sellers Competitive Market Analysis and Free Relocation Kits to Any City, USA.