Austin Texas Real Estate: Refinancing your home can be a good way to bring down your mortgage payment, raise money or merge debts with high interest rates. However, you need to do your homework before deciding to refinance. One important factor is the difference between current interest rates and the rate of your original loan. Also homeowners need to take into account the amount of time it will take to recoup the costs of refinancing.
When to refinance
You should refinance your home if interest rates fall more than 2 points below your existing mortgage rate because refinancing usually involves most of the same closing costs as the original loan. Anything less than 2 percent the savings on your monthly mortgage payment might not be significant enough to be worth your while.
Is it worth it
If it costs $4,000 to refinance a house, and the monthly mortgage payment is lowered by $120 it would take almost 4 years for the savings to cover the costs of refinancing.
In addition, you may be able to roll the closing costs of a refinance loan into the new note. You don't avoid the closing costs, but instead pay them back over time along with the rest of the loan. Refinancing usually lengthens the time it takes to pay off your house. If you are 2 years into a 30-year mortgage and then refinance with a new 30-year loan you'll end up making payments on the house for 32 years. If the monthly savings are substantial enough you still could end up paying much less over the long haul with the new loan.
Adjustable Rate Mortgages
Rising interest rates might influence you to covert your ARM into a fixed-rate loan if you plan to stay in your house for several more years. You may plan to move in a year or two and find a lender who is willing to offer you dramatic interest rate savings with an ARM. In this case it might make sense to switch from a fixed-rate loan to an ARM.
Equity
With enough equity you can refinance in order to take cash out of the property. Lenders will typically allow you to borrow against the equity you've built in your house. These types of loans are also called home equity loans.
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