Real Estate

When You Save By Refinancing

The economic crash, or recession, has had a few good things especially for those who continued to pay their bills on time and kept up with things. It can be an economic opportunity. Many of those middle class families with extra cash around or large investors were able to take advantage of foreclosed properties or what is there for those with no cash or guts to snap up bargain homes not needed.

One great reason to refinance is to save money. Income is not just a product of investments, but it can also be accomplished through savings and that is at a phenomenal level nowadays. Many still don’t understand, though, how refinancing can save.

Refinancing creates savings for you in two ways – lower monthly mortgage payments and lower interest rates. Lower monthly payments is a given. All refinanced mortgages, regardless of prevailing market rates give debtors lower monthly payment terms. The real secret is playing with interest rates.

Generally, two factors determine the interest rate your bank or your mortgage provider gives you on a first mortgage – prevailing market rates and your credit rating. Both of these factors fluctuate. If you have bought your home and taken out a mortgage three to five years ago, interest rates have dropped significantly since then; now would be a good time to consider refinancing, before market rates pick up. Additionally, if your credit rating has significantly improved since, refinancing might also save you a significant amount.

However, the market conditions are not the only factor to consider. The final decision will come down to whether or not the costs of refinancing will be more or less than the expected savings. Usually the costs of closing are 2 to 3 percent of the principal amount and those need to be paid at the time of the closing. If you look around nowadays for refinancing mortgages you will most likely find no-cost refinance offers.

Speaking of no-cost offers, beware of such offers. Freebies are a thing of the past. Companies who cover closing costs do not eliminate this cost from your account; they collect it in alternative ways, often in higher-than-market interest rates. If you have a short-term horizon, however, you can enjoy upfront cost savings without the burden of high mortgage rates for a long period of time.

Going back to the decision at hand, when does refinance actually save you money? Do your math to find out! An easy way to do this is to add up the remaining amortizations on your current mortgage (of course, include all charges applicable to date), and compare this with the sum of the total payments you expect to make under a refinanced mortgage, plus closing costs. Both options are cash outlays; pick the option that gives you a smaller figure.

As an alternate tool use the savings approach to make a decision if refinancing is a sound option for you. You can do a little math and see what the interest payments will be on the remainder of your current mortgage then do the same for the refinance offer. Take the difference and compare with costs of the refinance option. If it comes down to the interest amount is larger in savings than what you would pay for refinancing then go ahead and if they are not then stay where you are.

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