MARQUETTE - Wondering whether refinancing your home mortgage makes dollars and sense? The Federal Reserve has a number of worthwhile points to consider in its online Consumer's Guide to Mortgage Refinancing.
Some of the questions to ask when trying to decide on refinancing include whether interest rates have fallen or do you expect them to go up, is your credit score eligible for a lower-rate mortgage and if you might like to consider a different type of mortgage.
"But before deciding, you need to understand all that refinancing involves. Your home may be your most valuable financial asset, so you want to be careful when choosing a lender or broker and specific mortgage terms," the guide read. "Remember that, along with the potential benefits to refinancing, there are also costs."
The guide explained that when you refinance, you pay off your existing mortgage and create a new one. You may even decide to combine both a primary mortgage and a second mortgage into a new loan. Refinancing may remind you of what you went through in obtaining your original mortgage, since you may encounter many of the same procedures -and the same types of costs- the second time around.
Some reasons to consider refinancing highlighted in the guide include:
- Lowering your interest rate. The interest rate on your mortgage is tied directly to how much you pay on your mortgage each month. Lower rates usually mean lower payments. You may be able to get a lower rate because of changes in market conditions or your credit score has improved. A lower interest rate may also allow you to build equity in your home more quickly.
- Adjusting the length of your mortgage. You may want a mortgage with a longer term to reduce your monthly payment. But a longer duration to pay results in more paid toward interest. Shorter term mortgages generally have lower interest rates. You pay off the loan sooner, reducing interest costs, but likely have higher monthly payments because you are paying more of the principal each month.
- Changing from an adjustable-rate mortage to a fixed-rate mortgage. If you have an adjustable-rate mortgage, your monthly payments change as the interest rate changes. Your payments could increase or decrease. You might consider switching to an adjustable-rate mortgage with better terms; one that starts out with a lower interest rate, lower payment caps or smaller interest rate adjustments. A fixed-rate mortgage keeps your payments the same and could be helpful if you think interest rates will increase in the future.
- Getting cash out from the equity built up in your home. Home equity is the dollar value difference between the balance you owe on your mortgage and the value of your property. When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment. This option could provide cash for home improvements or other things. But remember that when you take out equity, you own less of your home and it will take time to build equity back up. If you sell your home, you will not put as much money in your pocket after the sale. Other alternatives to cash-out refinancing include a home equity loan or line of credit.
The federal reserve said there are several circumstances when refinancing is not a good idea including when you've had your mortgage for a long time, your mortgage has a prepayment penalty or when you plan to move from your home in the next few years.
Other points to consider when you do think you might want to refinance your mortgage include whether you are eligible to refinance and what refinancing will cost. There are several fees involved including application, survey, loan origination, appraisal, inspection and closing fees. There are also possible points -sometimes involved in loans to reduce interest rates or earn money on the loan for lenders and brokers- to consider along with homeowner's insurance and title search costs.
For a great deal more helpful government information on mortgage refinancing visit: www.federalreserve. gov/pubs/refinancings/default.htm.
John Pepin can be reached at 906-228-2500, ext. 206.