A recession is not all bad and for those who have kept their finances clean and always paid bills on time are presented with a one of a kind economic opportunity. Financially strong investors and some middle class people with some extra money are able to make speculative investments in properties that have been foreclosed. The question is what benefits could there be for those with no extra money to spend or who don’t have the nerve to buy cheap homes they don’t really need.
One great reason to refinance is to save money. Income is not just a product of investments, but it can also be accomplished through savings and that is at a phenomenal level nowadays. Many still don’t understand, though, how refinancing can save.
Refinancing creates savings for you in two ways – lower monthly mortgage payments and lower interest rates. Lower monthly payments is a given. All refinanced mortgages, regardless of prevailing market rates give debtors lower monthly payment terms. The real secret is playing with interest rates.
Generally, two factors determine the interest rate your bank or your mortgage provider gives you on a first mortgage – prevailing market rates and your credit rating. Both of these factors fluctuate. If you have bought your home and taken out a mortgage three to five years ago, interest rates have dropped significantly since then; now would be a good time to consider refinancing, before market rates pick up. Additionally, if your credit rating has significantly improved since, refinancing might also save you a significant amount.
It is also noteworthy to mention that, in addition to these market conditions, the decision boils down to matching the cost to refinance with projected savings. Typically, closing costs are 2-3% of your principal amount, paid upfront. Although if you are shopping for mortgages and refinance mortgages these days, you’ll very likely encounter no-cost refinance offers.
It is best to beware of those no-cost offers, though, because a freebie like that no longer exists. If a company offers to cover closing costs that does not mean that they will take it from your account. Instead they will just collect what they are laying out in different ways, such as higher than average interest rates. If you have short term plans than you can still enjoy the immediate cost savings from removing the burden of high mortgage rates.
Going back to the decision at hand, when does refinance actually save you money? Do your math to find out! An easy way to do this is to add up the remaining amortizations on your current mortgage (of course, include all charges applicable to date), and compare this with the sum of the total payments you expect to make under a refinanced mortgage, plus closing costs. Both options are cash outlays; pick the option that gives you a smaller figure.
An alternative is to go with the savings approach. In order to determine if the idea of refinancing is a good one, then calculate the interest payments you would have expected to pay on the outstanding balance of your mortgage and then calculate the total anticipated interest to be paid on the refinancing option. Just find the difference between the two and compare that amount with the amount of closing costs that will have to be paid for the refinancing. If the interest saved is more than the total cost of refinancing then you should go and do it since you would really save money. If refinancing will cost you more than just stay with the mortgage you have.