Points To Consider About Refinancing

Because of the economic downfall in the housing industry, refinancing of mortgages may be a common practice in the coming months. Low interest rates and the receptiveness of borrowers toward the idea of refinancing may help save many buyers and current homeowners having trouble making payments. Although many have vouched for the benefits of refinancing, homeowners should evaluate their personal preferences, financial standing and current mortgage status and compare these with the various options available before planning their next move.

There are many facts surrounding refinancing and homeowners need to know important aspects so they can make informed decisions. Refinancing your mortgage is for the long term and needs to be a choice that is thoroughly considered. Here are five things to consider before refinancing your mortgage:

Penalty Costs
Refinancing means paying off your current mortgage and obtaining another mortgage at a different interest rate, usually at a fixed rate and term. In some cases, penalty costs may be imposed on your current loan. Penalties incurred may be higher than the cost savings from refinancing the mortgage, making the ideas of refinancing no longer attractive.

Monthly Payments
If you refinance to get lower monthly payments, be sure to get a fixed interest rate mortgage. Adjustable rate mortgages seem appealing only at first, when your payments are low. However, when an adjustable rate goes up, you may not be able to make the higher payment. Now is a good time to get a fixed rate mortgage because interest rates are low.

Transaction Costs
As with mortgage transaction, refinancing involves transaction costs such as attorney fees, points, appraisal fees, inspection fees and prepayment penalties. All of these raise the cost of refinancing and need to be balanced with the cost savings from switching loans. As a rule of thumb, if you plan to stay in your current property for the long term, transaction costs will be offset with savings in repayment amounts. In this case, refinancing should be a good option.

Regaining Tax Deductions
Refinancing may help you pay less tax by providing deductions associated with the new loan. With a new mortgage, you may have fees that are deductible. In addition, a larger proportion of your house payment will go toward interest at the beginning.

Alternatives to Refinancing
Refinancing may not always be the best option for you. Other financial options, such as a home equity line, allows you to keep your current mortgage and have the flexibility to withdraw cash based on the equity you have in your home. Another option is a second mortgage, which will be based on a shorter term but with higher interest rates.

Refinancing may or may not be right for you. Get sound advice from a financial counselor or other trustworthy and knowledgeable financial professional before you refinance.