Refinancing a home mortgage can be both wise and risky. Nonetheless, you need to know whether it is the choice that really suits you. Look into the some important details first before jumping in. Don’t make the mistake of choosing a mortgage derived only on its APR or annual percentage rate. There are still a lot of other important variables to consider such as the term of the mortgage, the variability of the interest rate and points. Let’s tackle them one by one.
The term of the mortgage
This refers to the period of time that it will take you to pay off the loan’s assets and interest. Even though short-term mortgages generally offer lower interest rate compared to the long-term ones, they usually involve higher pay. On the other hand, it is wiser to choose the former since they can result in a significantly reduced interest costs over time, saving you a lot of dollars.
The variability of the interest rate
There are basically two types of mortgages: those with “fixed” or unchanging interest rates and those with variable rates which can change after a deliberate amount of time has passed, such as one year or five years. While an adjustable-rate mortgage (ARM) normally lays out a lower introductory rate compared to a fixed rate mortgage with a relative term, the ARM’s rate could jump in the future if interest rates increase. If you look forward to staying in your home for a long time, it would be appropriate to take refuge in the security and the predictability of of a fixed rate; however if you intend to sell before the rates are allowed to go up, then it would make sense if you go for ARM.
Points
Points are also known as “discount fees” or “origination fees.” They are fees that you pay to a lender or a broker when you close the deal. One point is equivalent to one percent of the loan’s value. While a “no-cost” or “zero points” mortgage does not carry an upfront cost, it would be a lot more expensive if the lender charges a hovering interest rate instead. So you will have to determine whether the savings from a lower rate justify the added costs of paying points.
Now keep in mind that your current lender may make it easier and cheaper for you to refinance compared to other lenders. This is because your current lender most likely has all the necessary account and financial information on hand already, so it saves you a lot of time and resources needed to process the application. But don’t just stop there. It is also wise to make a well-informed and confident decision by shopping around, comparing notes and asking plenty of questions.
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