When you have a mortgage, it means that you have a home that you own, even if you are still paying for it. Therefore, the money that you have paid into your home loan is money that you are often able to access. Refinancing a loan means taking a look at the money that you have put into it, and finding a better deal including the money that you have already spent, so that you have a smaller loan with lower repayments. For some people, refinancing also means that you are taking a look at the money you have already put into the house, and perhaps getting some of that money back.
Why Refinance?
Many people look at refinancing their home loans because it means that they can get a home loan at a lower interest rate, and that they will be able to reduce their monthly mortgage payment. It can allow them to have more money to spend, and more to invest as well.
What It Means to Refinance Your Mortgage
When you refinance your home mortgage, it means that you are essentially paying back the entire first mortgage that you took out, and then taking out another mortgage for what remains on your home. It is important to consider whether or not you want to refinance very carefully, so that you will be able to make a good choice about the type of mortgage you want to have.
How to Decide
The first step in getting a lower interest rate and lower payments by refinancing your home is to make sure that you are going to be getting the best deal by choosing another mortgage. First of all, you want to refinance a mortgage if the current mortgage interest rate you would be able to get is at least two percentage points below what you currently have, if not more. If this is the case, you should continue with your decision to refinance your home.
What It Affects
When you have a lower mortgage interest rate, you are going to be paying less total interest each year. Therefore, your tax deductions for mortgage payments are going to be less. This will lead to an increase in your income tax liability. Therefore, you will need to offset this towards the savings that you have in your mortgage interest. The impact in total of a reduced rate or refinanced mortgage is going to depend on the tax bracket that you are in, your income, and the other deductions that you might have.
Questions to Ask Yourself
In order to get a better deal with your refinanced mortgage, there are going to be several questions that you need to ask to insure you are going to be taking the right steps.
Figure out how long you are going to be staying in your current home. If you feel like you are going to live there for 3 years or less, chances are that you won't be able to recover the costs of refinancing before you have to move. This can be done by looking at the costs of closing on the new mortgage as compared to the savings that you are getting by refinancing. If your savings come to 100 dollars a month, and it takes 4,000 dollars to close on the loan, you need to make sure you are making enough monthly payments to cover that cost, before you move.
Also, you will need to decide whether you want to stay with your current lender, or whether you would like to change lenders. If you stay with your current lender, chances are good that for a fee you can renegotiate your mortgage at a lower interest rate, which is different from refinancing but which will give you the same general outcome. If you can't renegotiate with your current lender, try taking a look at what other lenders have to offer. Often, they are going to be more than willing to work with you on a good deal.
Another question that you might want to ask would be if you should refinance your mortgage at a larger amount than what you currently have. This is a good option if the value of your home has increased, because it means that you are then going to be putting an amount of money into the home that makes sense for the value of the home. This will also allow you to build more equity and therefore be able to access this home equity as well. Just make sure that you can afford the larger mortgage, generally this is possible if you are refinancing to a lower interest rate, but it definitely pays to check and double-check to prevent future problems.
