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When does it make sense to refinance?
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Refinancing can be useful, if your present interest rate on your mortgage is more than two percent points higher than the current financial market rate. Most housing researchers focus on the financial option in the refinancing process. If they can get a present value wealth gain from refinancing, then they should do it.
In one sense refinancing can be a costly affair. When you are opting for refinance, literally you are originating a new mortgage. You will have to pay the refinancing penalty and closing costs again. If the costs of your new loan can be recovered within the first thirty months of new loan, refinancing can be a good idea.
Refinancing can be done
1. In cases where costs of refinancing are low
2. If there are no points available in the mortgages
3. If the current interest rates are low
4. By lowering your payment by increasing the term of your mortgage. Then you will pay less principal each month and mo re interest.
5. If the overall cost of the loan is lowered on the loan by cutting the term of the mortgage. By this way, you pay more principal each month reducing the interest paid over the life of the loan.
6. To shift from a jumbo loan to a conventional one. For some one who is having a jumbo loan can profit by converting it into a conventional one by the help of refinancing. This way he or she may have to pay only a lower rate.
7. Refinancing can be used to shift from an adjustable rate into a fixed rate mortgage. When you buy a home for the first time, you may not qualify for a fixed rate loan. This forces you to stick on to a fixed rate loan. It can make sense to refinance, if your ARM rate shoots up.
8. Sometimes it can happen that you can gain incredibly well, when there is a reduction in interest rates. You can do it by replacing your current mortgage of 25- 30 years with a mortgage which would make your home completely yours in a short span of time. The advantage is that you still have to pay only almost the same amount as you were paying earlier.
9. You would have forced to take private mortgage insurance (PMI), if you had paid less than 20% as down payment. But if you are fortunate enough to have your home price raised to a significant value, you may be able to able to make your private mortgage insurance removed. So if your home equity is of more than 20% value on appraisal, you might be lucky enough to avoid private mortgage insurance.
The appropriateness of your decision on refinance depends on the variations in interest rates. The larger the decrease in current mortgage rates relative to contract mortgage rates, then the gain is larger. It also depends on the refinancing costs. Smaller the cost for a given interest rate change, the larger the gain to refinancing. If the opportunity costs of refinancing are large, then it is better not to refinance.
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