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Mortgage Refinancing: It's All About Timing

November 30th, 2010

Just like any other financial decision you have to make in your life, understanding when to refinance your mortgage will make a world of difference. Alternately, knowing when it is not a good idea to apply for mortgage refinancing will ensure that you will not get screwed with any hullabaloos in the market.

In practical terms, mortgage refinancing is about saving money on total loan amount and monthly mortgage fees but there is a good time to make a move.

The 2%-Rule
One of the best times to refinance your home is when you can get an interest rate that is two percent lower that what your current loan offers. Ideally, 2% is enough to recoup the cost of the loan. However, there are certain requirements you must meet if you want to take advantage of lower rates including your credit score and the amount of equity left in your home. Also, take note that you have to stay in your properly for a certain period of time (called the break-ever period) to recoup the cost you paid for the new loan. As a general advice, avail refinancing if the prevailing rate is low.

Clear Goal
Many homeowners wish to refinance their mortgage because they have a goal in mind. Some want to consolidate debt through refinancing. A common misconception is if making such move will pay off debt. Wrong. Entering into consolidation only restructures your debt. So if you owe $10,000 from your credit card company, refinancing will not pay them off; it will only extend it throughout the life of your loan.

Homeowners also refinance their mortgage because they want to switch from ARM to FRM. Adjustable rates can be a headache. For one thing, you cannot definitively know what would be the prevailing rate 12 months from now. So if the rate hits the lowest today, switching to fixed rate mortgage is the best idea.

Understanding your goal doesn’t always mean you have the right to take the loan. Sometimes, understanding would mean letting go of lower rate after realizing that such move is unwise.

When to Refinance
Low rate is a good trigger to consider refinancing, but other factors have to matter. Refinancing costs money. In 2008, the national average for closing cost on a $200,000 loan is $3,118 according to Bankrate closing cost survey. This does not include other fees such as insurance, taxes, and other dues.

To recoup the cost and get the savings promised by your new mortgage, you have to consider how many months are you willing stay on your property. For example, your new loan will save you $150 on your monthly payment and the closing cost of your new loan is $3,118. It will take you 21 months to recoup the closing cost. Monthly savings are influenced by several factors including points, credit score and rate.

Tools
Mortgage calculators will help you determine how much savings you will get every month with your new loan. These tools are available online, free of charge.

Mortgage Consultant
Bad advice leads to bad credit debt so make sure that you consult a reputable mortgage advisor to help you know if mortgage refinancing is really for you. Consultation is usually free and you are under no obligation to continue dealing with an advisor if you feel uncomfortable with him/her.

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Adjustable Rate Mortgages vs. Fixed Rate Mortgages

November 30th, 2010

Buying a home can be an exciting and stressful time for anyone. While you may be excited at the prospect of owning your own home, especially if it is your first home purchase, the idea of choosing between all of the many different types of mortgages may leave you feeling confused and apprehensive.

Two of the most common choices youll find in the mortgage market are adjustable rate mortgages and fixed rate mortgages. Fixed rate mortgages are the most traditional type of home mortgage, offering a fixed interest rate that does not change throughout the life of your loan. There are a number of important advantages associated with this type of mortgage. First, if you are budget conscious, this type of mortgage will give you the peace of mind in knowing that your monthly mortgage amount will not change. You can budget the remainder of your financial obligations without worrying about a changing mortgage payment to throw things off.

An adjustable rate mortgage works differently. With this type of mortgage you may be able to obtain a lower interest rate than would normally be available with a fixed rate mortgage; however, the interest rate is not fixed. This means that your monthly mortgage rate may change as interest rates change. With such a mortgage you may not be able to regularly plan your budget due to such fluctuations. While there is usually a cap that will keep the interest rate from fluctuating too much, even a little fluctuation can be too much for some homeowners. Of course, there is also the possibility that interest rates will drop and if that is the case, because your mortgage is adjustable, your monthly payments will drop right along with the interest rate.

When deciding whether a fixed rate or adjustable rate mortgage is your best choice, you need to give thought to several factors. Ask yourself whether it is more important to be able to plan your monthly budget without wondering whether your mortgage will fluctuate or whether you would prefer to receive a lower interest rate in the beginning of your mortgage.

Remember that if you decide you would like to obtain the advantages of both you do have other options available to you. For example, if you feel the interest rate offered to you on a fixed rate mortgage is too high but you want the security of not having to worry about a fluctuating interest rate you can always buy down your interest rate by purchasing points. This will mean more up front costs for your mortgage; however, it may be worth it to decrease the interest rate, especially if interest rates are currently high.

If you do elect to go with an adjustable rate mortgage make sure you understand exactly how high the rates may go as well as ensure you have enough wiggle room in your monthly budget to cushion increases if they occur. This may help to keep you out of a tight spot and possibly losing your home due to rising interest rates.

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