Refinancing a home loan is a very easy process to complete and takes a very short amount of time to complete. Refinancing a home loan means to change the terms of your old loan with a new loan and with more favorable terms. The new loan will pay off the old loan, so you make payments only on the newer loan. A borrower may borrow extra money during the refinancing process, which means that the borrower is taking equity out of their house and is also known as “cash out” refinancing. People mainly refinance their home loan to receive a better interest rate, lower their principle due to an increase in home equity, consolidate all debts into one monthly payment, or to take out equity from their property.
If you are contemplating if you should refi your home loan, it is important that you take all costs into consideration. Many homeowners fail to include the lender’s fees, appraisal fees, cost of points that lower your new interest rate, and other related refinancing expenses. By the time the refinancing process is completed, many borrowers end up spending more money in refinancing costs than the actual savings realized through the refinance. A homeowner that is thinking about refinancing their home loan must request all fees upfront, so they fully understand how much the process will cost.
If a borrower is refinancing their home loan to save money on future interest payments, then they should determine how much money they will receive over the remaining term of the loan. Borrowers should have a good estimate of how long they plan to stay in their house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. For example, if a borrower’s interest rate on the new loan is marginally lower and they plan to move the following year then it is likely that the borrower will pay more in expenses than actual savings from the refinance.
Refinancing can be worthwhile, but it does not make good financial sense for everyone. A general rule is that refinancing becomes worth your while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings.