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Many people who refinance want to lower the monthly payment from their current mortgage. In terms of comparing loans, there are different loan products in the market today. Generally, adjustable loans have lower rates than fixed loans. Most adjustable rate loans are based on a 30 year term. The most common fixed rate products have 15 and 30 years terms, but there are also 10 year and 20 year terms available. If you have had your current mortgage for a short period of timer, then lowering your interest rate and refinancing is usually a smart move. However, if you have had the same mortgage for many years, refinancing with a new 30 year term loan may not be the best solution. The reason is that you will start a new 30 year cycle. You may try a shorter term loan which have the advantage of lower interest rates than 30 year loans. For example, if you currently have a 30 year fixed rate mortgage and have had it for 10 years, this means that you have 20 years remaining to completely pay off the loan. Instead of refinancing with a new 30 year loan, it will probably be better to choose a 20 year fixed loan. If you do choose a 30 year loan, but want to pay your loan off in 20 years or less, then make sure to keep the same payments you had before. If you just pay the minimum payment each month, then it will take 30 years to pay the loan off. Another way to lower your rate is if you have a sub-prime loan with a high interest rate, but your credit has improved. You may be eligible to qualify for the lowest prime interest rates.
One must remember that refinancing is usually not a simple process of changing terms and rates. The refinancing process involves closing costs and fees similar to those found during the home purchase loan process. This includes closing costs, lender fees, points, appraisal report cost, credit report fee, and various other costs. Most lenders offere streamlined refinance programs if you choose to refinance with the same lender with which you have your current mortgage. The process is quicker and there may be discounts for lender fees.
The first step in checking if refinancing will save you money is to find out the monthly payment and closing costs for the new loan you are seeking. If current interest rates are higher, then refinancing is usually not logical if the goal is to save money and lower monthly payments. When you find a loan with a lower monthly payment, then you should look at closing costs and how long you expect to keep your new loan. There are also No Point, No Fee programs which have no closing costs.
You need to find out when you will break even after including the closing costs and fees on the new loan. If your monthly payment is reduced by $100 each month, then you will be paying $1200 less per year. After 2 years, this figure climbs to $2400. If your closing costs are $2000, then you will break even after 20 months. So, a simple way of looking at refinancing is to look at the savings in monthly payment, your closing costs and fees, and how long you expect to keep the loan. The longer you keep the loan, the more you save per month from the lower monthly payment. In some cases, the change in monthly payment may be so small that it does not cover the closing costs and fees.
There are also other factors such as tax deductions and the terms of the new loan. Remember that any points you pay on a refinance are deductible over the life of the loan. This is different from a home purchase where points are fully deductible in the year you close the loan. In addition, you should look at the terms of your new loan, especially for adjustable loans and interest rate adjustments.
Another note to remember is to make sure you do not have a prepayment penalty on your current loan. Many prepayment penalties are only valid for 3 or 5 years so even though you had a prepayment penalty when you first received your mortgage, it may be past the valid period.
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