The new Home Affordability Refinance Program has made it even easier to refinance your home, even if you owe more than its value. Just because you can refinance your home, however, doesn’t mean you should. Make sure you consider the answers to the following questions carefully before you commit.
Why Do You Want to Refinance?
Refinancing your home loan will potentially allow you to get a better deal. This might mean taking up a new home loan with an improved interest rate or a longer loan period, for example. Refinancing typically helps homeowners free up money in the short term, and often saves them cash in the long term.
“The typical borrower who refinanced reduced their interest rate by about 1.5 percentage points,” affirmed Chief Economist Frank Nothaft. “On a $200,000 loan, that translates into saving about $2,900 in interest during the next 12 months.”
It’s easy to look at the general reasons why people refinance their homes, but perhaps it’s more important to consider why you’d take this action. Perhaps you want to pay less on your home loan so you can pay back high-interest loans or beef up your policy. Paying off debts and protecting your home are both worthwhile ways to spend extra cash. Perhaps you’re already dreaming about the vacation you could take if you could reduce your monthly payments. This is another tempting reason to act, but you may need to examine the pros and cons of refinancing if it’s your main motivation.
What’s the Current Interest Rate?
The interest rate you can secure is one of the greatest considerations when deciding whether to refinance your home. There’s no point in getting a new home loan if your payments will be higher than they are currently.
In December 2013, the average interest rate for a 30-year fixed-rate mortgage stood at 4.57%, which is close to the highest it’s been in two years. Because of rising interest rates, there’s been a 71% drop in refinancing figures since May.
As a rule, you should look for rates that are at least two percentage points less than you’re currently paying. Also keep in mind that published interest rates only offer a ballpark figure. Your personal circumstances, including your credit score and intended loan type, will influence the interest rate available to you.
Will You Incur Any Penalties?
Penalties can easily eat up any savings you might make, so it’s important to consider them before refinancing your home. Some financial institutions charge hefty fees for paying out your loan early. These fees make it unfeasible to refinance your home.
A refinanced loan also often incurs “moving costs,” including legal fees, disbursement costs, new valuation costs and stamp duty. These extra charges could easily cost 2–3% of your refinancing amount. Banks that offer to pay these moving costs usually aren’t being altruistic. You’ll likely find their interest rates are higher, so make sure you do your sums before signing on the dotted line.
Many refinancing packages also lock you into the loan for a fixed term. If you expect to exit your loan early, you could be slugged up to 5% of your loan amount.
The decision to refinance your home is a big one, but if you weigh all your options carefully, refinancing can save you plenty of money in the long term.
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