Saving on Your Home Mortgage

David Sung | July 29, 2013

Refinancing home mortgages is always a hot topic. A mortgage is typically a family’s biggest expense with the home being their biggest investment, and their ears are always tuned for ways to save money on their monthly costs.

Why Are You Refinancing?

It’s important to research your decision to refinance, and not simply do it because interest rates are low. Most financial experts agree that you only want to refinance your mortgage once. Most homeowners are interested in reducing the amount of interest they’ll pay on the home while others are interested in switching from a fixed rate loan to an adjustable rate. It’s also important to note that refinancing typically only makes sense if you plan to be in the home for a long period of time. Refinancing a mortgage on a home you intend to sell soon makes little financial sense not to mention that time invested into getting the new mortgage.

Loan Types

If you’re looking into refinancing to receive cash typically used for home improvement, then you will want to investigate a home equity line of credit, which enables the equity in your home to be used to provide the cash. Typically called “cash out refinance,” this type of loan allows you to borrow against what you have paid towards your home already. For example, if your mortgage is for $150,000 and you’ve paid half of the principal, you would have $75,000 in equity. Your new loan would still be for $150,000, half of which you would use to pay back the initial loan.

The two types of home loans are Fixed and Adjustable Rate. A fixed rate loan will ‘lock’ your monthly payments into the current interest rate, allowing you to budget years in advance. Many homeowners were looking to move to this type of loan during the time of low interest rates in the past several years. Adjustable rate mortgages (ARM) were blamed by many for the cause of the high rate of foreclosures in America recently. The previous trend for ARM’s was that they were used to lower initial monthly payments to help families get a mortgage. Now ARM’s are more suited for borrowers that have significant resources, and will not be affected if their monthly mortgage payment goes up.

Closing Costs

Similar to the tax, title and registration fees when you buy a new car, closing costs are often overlooked when considering a new mortgage. When you close on your previous mortgage, you will need the associated closing costs, which can be thousands of dollars. There may also be a pre-payment penalty. When evaluating your potential savings with the refinanced mortgage, factor in the length of time it would take to recoup your closings costs by making lower payments. You may be surprised that it takes quite a while to get even again. Alternatively, you may still end up saving big.

Plan Ahead

Remember, your mortgage rate will hinge on your outstanding debts and credit score. If you anticipate applying for new mortgage in the future, begin cleaning up your credit as best as you can beforehand. Pay off any credit cards and move any unsecured debts into secured debts.

No matter what your goals for refinancing are, always keep in mind that it’s a serious undertaking. Do your homework on both your needs and the broker you will be working with because it may save you thousands in the end.

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