Home Loan Refinance Considerations

Who is a good candidate for a home loan refinance? Obviously a consumer who is paying more in interest than the current interest rate that is being advertised. General wisdom dictates that a homeowner should consider refinancing when interest rates drop by at least two percentage points, but there are copious exceptions to this rule. If a homeowner has the potential of realizing a monthly savings in their payment – and if this will make budgeting a lot easier for the family overall – and also the accompanying savings over the course of the loan, this is a worthwhile financial decision to make.

An example is the refinance of a mortgage loan that will shave off $100 from the monthly home loan payment. At the same time, the amount in points and fees that the consumer needs to pay equals $1,000. When you take the cost and divide it by the savings, you arrive at the number of months it will take for the borrower in the example to break even. In this case it is 10 months. If this consumer plans on staying in their home for at least 10 months – but perhaps longer – they will break even and realize the savings. For them this is an advantageous step. On the flipside, if they are intending of staying in the home less than these 10 months, then this move is not in their best interest.

When it comes to signing up for a new rate, it is also noteworthy that this might be a good time to change fiscal vehicles. For example, while a 30 year fixed rate loan worked perfectly well for the mortgage borrower intent on locking in a good rate, for the customer wanting to refinance an adjustable rate mortgage might make a lot more sense, especially if they are in unique fiscal circumstances that may be changing in the foreseeable future.  As a matter of fact, there is a good chance that some homeowners look to these fiscal vehicles as a means of helping to finance their next move. A home loan that has an adjustable rate option and offers a very low rate for the initial five years has the power to provide a unique savings opportunity for the customer who is preparing to move after that time.

It is noteworthy that consumers also refinance their mortgage obligations to pay off their loans sooner. For example, those with a 30 year loan may opt for a 15 or even a 10 loan that can seriously limit the amount of interest which is being paid over the length of the loan. Be mindful of prepayment penalties, however, which could counteract any of the savings you might otherwise realize when refinancing your home loan. A prepayment penalty is found in the document of your original loan and it explains how many years into the mortgage this penalty will become void. In some cases it is smarter to wait out the term specified in the loan than incur the fee. The fees which are charged by the banks who offer refinance loans, on the other hand, may frequently be renegotiated to make them even more attractive to the borrower.