What Is Mortgage Refinancing?
Mortgage refinancing is a transaction in which you essentially trade one mortgage for another. You take out a new mortgage with more favorable terms that pays off the old mortgage. The benefit of mortgage refinancing is that you can get a lower interest rate, a longer payment period, and a variety of other terms that reduce the sum you must pay monthly. However, you may also find yourself paying a larger amount over the lifetime of the mortgage, depending on what terms you are able to get, and fees can add an unpleasant extra sum to your total. Before you decide upon mortgage refinancing, weigh these points to ensure that you get the best possible terms.
First, how much will you really pay? If you maintain or decrease the length of your mortgage while getting a better interest rate, you will definitely pay less over the life of your mortgage. On the other hand, if you extend the length of your mortgage as well as lowering your interest rate, you may find that the added time for interest to accrue adds dollars to the total. If your need to lower your monthly payment right now outweighs your need to save money in the long run, then this kind of mortgage refinancing may be worth accepting regardless of the drawbacks. You will also be able to enjoy lower payments now, when you have greater financial need, and make larger payments later when your finances are not as tight; this type of refinanced mortgage has the virtue of flexibility. If your future payments are large enough, you may end up paying as much as you would have paid for your original mortgage, or possibly even less.
Second, how much will the fees for mortgage refinancing cost you? You will need to pay for title and escrow fees, as well as fees for an appraisal, lender fees, credit fees, taxes, and insurance. After comparing numbers with your mortgage refinancing agent, you might discover that even after the fees are added in, you have still lowered your payment. It may also be possible to reduce the effect of the fees by taking a no cost mortgage or by adding the fees to the total balance of your mortgage.
Mortgage refinancing can be an indispensable way to reduce your monthly expenses and save money. However, a carelessly chosen refinanced mortgage can also drain money from your bank account for years to come. Remember your goals (do you want lower monthly payments, or a lower total payment?) and factor in all costs, including the fees. With a little care, you can make sure your mortgage refinancing works for you, not against you.