Home loan refinancing is the first and easiest option for many homeowners who are struggling with overly high mortgage payments. The most common reason monthly payments are suddenly out of reach is :
The adjustable rate mortgage (ARM)
When interest rates were low and continuing to fall, many homeowners opted for variable rate mortgages that kept pace with interest rates. As a result, interest rates reset and have a negative effect when rates rise. Many homeowners begin to see their mortgage payment steadily increase and choose to switch to a traditional fixed rate loan.
In some cases, refinancing may be sought simply for the benefits and not because the homeowner is having financial problems. It’s important to keep the big picture in mind and think long-term, especially when it comes to home loan modifications.
Home refinancing options
You can apply for a refinance that doesn’t change anything about your loan except the interest rate. This usually lowers your monthly payments slightly and saves a lot of money over the remaining term of the loan. This is a good general option.
You can apply for a refinance to avoid having to pay a balloon payment if you have entered into a short-term ARM. Refinancing allows you to roll that amount back into the loan and get a fixed rate. This is a good option if you are in a difficult financial situation.
You can apply for a refinance that lowers your interest rate, but keeps your payments the same or slightly higher – this allows you to pay off the principal faster and save even more money. This is a good option if you are financially stable.
If your credit rating has improved significantly since you bought your home, you can often benefit from refinancing at a lower interest rate. If you need cash, you can tap into the equity in your home and increase the loan principal. This is often accompanied by an extension of the loan term to the original term.
Appraisal, credit report, underwriting, title insurance, escrow and recording fees, as well as possible prepayment penalties, may apply. These and a dozen other fees can add up quickly to thousands of dollars, especially if you’re also paying points, so make sure you save enough money to come out ahead. You can also try to get these fees waived.
If you stay in your home long enough to recoup the fees and take advantage of your long-term refinance, go for it. If not, you may need to reconsider your decision. Your attorney can help you do the math and assess the consequences of refinancing.
Your lender should be able to provide you with a profitability chart showing how long it will take to pay off the closing costs versus the savings from refinancing the home loan. If you plan to stay in your home long enough to benefit, refinancing is a good option.