The most common way that home owners lower their monthly mortgage payment is by refinancing an existing mortgage. By refinancing you can save yourself from paying a higher interest and therefore pay less each month. Like any major financial decision there are factors to consider while evaluating your options. Let’s take a look at the benefits vs the risks of refinancing your current mortgage.
The best mortgage rates today are far lower than they have been in the past years. In most situations, that means the current rates are lower than when you first financed your mortgage. Refinancing could provide a better rate of interest which reduces your monthly payment. If you happen to be someone who has ARM financing then a ARM mortgage refinance is something you should strongly consider. Although rates are low now and your current ARM rate may be low, this will not always be the case. It’s best to lock in your low rate before market changes causes an increase in interest rates and your mortgage payment increases. Sometimes, by refinancing you can even increase or decrease the loan payment period to extend the loan of pay it off sooner.
There are often fees anytime you are financing a loan. A mortgage is no different. Although the costs may differ depending on who you choose to fund your loan, it is expected that there will be a cost associated with the refinance. The cost can easily be overcome by looking at the loan long term. In most situations the borrower can make up the upfront costs within the first few months and furthermore can save even more money for the following years. In many of the following situations the benefits outweigh the risks. Each person’s situation is different and should be evaluated by a mortgage professional.
Lower Interest Rate
For a mortgage of $100,000 amortized over 30 years, you could decrease your monthly premiums by $47.91 by refinancing from a 6.25 percent interest rate to a 5.5 percent interest rate. In addition you could also save $17,253 in interest charges over the life of the loan. Lowering an interest rate is the number one reason people decide to refinance. In today’s market this has driven high demand to refinance because of the low interest rates that are available.
Term Increase or Decrease
If you extend the term of a $100,000 mortgage at 6.25 percent interest from 15 years to 20 years, you could reduce your monthly payments by $126.49. On the other hand, if you have an existing mortgage term of 20 years and you refinance to a 15 year term, you could cut the time it would take to pay off your mortgage by 5 years. Both of these options could be reasonable reasons to refinance. Depending on your future financial plans either of these options may be suitable for you.
It is also possible to go for the both less interest rate and term adjustment. For this you need to negotiate for the lowest possible interest rate and then calculate the term that is most suitable for you.
Interest Only Mortgage
You can make your monthly premiums to the least possible amounts by refinancing with an interest-only mortgage. After the end of a typical five or ten year interest only period, your monthly payments will increase accordingly. Be cautious of these loans because the risk factor in this process is much higher. After the expiration of the interest only period, the monthly payable amount becomes very high. It is suitable for those who are facing a temporary financial problem but at the same time expecting a good financial condition in the future.
When you refinance your loan you must make sure that you have chosen the best possible option for your situation. Even though the new loan may offer a lower interest rate you may find yourself paying more than you need to. If you have any questions about the benefits or risks of refinancing please contact a preferred mortgage lender.