Millions and millions of homeowners today have refinanced their mortgages, and some of them are even considering refinancing it a second time. However, even though these rates are hitting rock bottom low, refinancing is not the correct option to choose for every homeowner. The following are the six reasons you should definitely opt out of refinancing your mortgage and consider other funding sources.
A Very Small Loan Amount
With a very small loan amount, it can become very difficult to save enough money by refinancing to make this entire process worthwhile. For instance, if you refinance a $750,000 loan from 5.5% to 4%, it might yield you a monthly savings of approximately $678. However, savings for a $75,000 loan will only amount to approximately $68 each month. Apart from this, lenders will often lack the additional fee or interest rate premiums for a small loan amount. Thus it becomes very difficult to obtain a rock bottom mortgage rate that will serve you well.
Small Rate Difference
Refinancing a large loan might result in noteworthy savings; however, getting a considerably better interest rate is very important over the long term as well. While it is possible to save a lot of money by refinancing to a slightly lower interest rate, it is a painfully slow and steady process. Considering the low mortgage rates we have today, shoot for an interest rate of at least 1% lower than your current rate to make both your time and effort worthwhile.
Short Time Frame
While refinancing today’s low rates can sometimes translate into huge monthly savings on the mortgage bill, those savings do not usually come without noteworthy upfront costs. If you have only a few years before you are expected to move or refinance again, you may not want to reap the benefits of saving from a lower monthly rate. There are numerous ways to refinance and save some money alongside “no-cost” refinance plans, even if you have a very short time frame. However, all of these options often come with complex interest rates, reducing the various benefits considerably.
Term Extension
If you have already refinanced and reduced the term of the loan you have taken, you might be forced to obtain a longer-term loan when you refinance. Characteristically, the shortest fixed-rate mortgage term is ten years. If you have less than ten years remaining on your loan, the one way you can ensure savings is to refinance the fixed term loans and then make payments to reserve the remaining term.
A Low Rate ARM
Federal Reserve policies have recently driven down short-term interest rates to unparalleled lows. As some of these short-term rates administer the interest rates for adaptable rate mortgages, many borrowers have, of late, seeing their interest costs fall as the new rates have sunk to the 2%-3% range. Refinancing to a fixed-rate loan today might help eliminate the interest rate risk associated with ARMs; nevertheless, this security comes at a very high cost and higher interest rates. Holding onto an ARM with a rock bottom interest rate, for the time being, may not be such a depraved idea.
Inertia and Hassle
Getting a fresh mortgage in today’s very tight lending climate is not fun nor easy. If your current lender does not offer a streamlined refinancing program, it may be a very time-consuming process. If the monthly savings are too small or the reimbursements take too long to materialize, refinancing costs may outweigh the reimbursements.
Refinancing your home mortgage may or may not be the right thing for you and your family. However, though there are many reasons to avoid it, there are also positive reasons to do it. The most important thing is that you research and decide if refinancing your mortgage will benefit you.
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