Three Rules of Thumb for Mortgage Refinancing

You might believe that deciding to refinance a mortgage necessitates only a quick comparison of loan interest rates. Unfortunately, that’s not really true. Refinancing is trickier than that! Fortunately, three utile regulations of pollex can often assist you do sense of refinancing opportunities.

Rule 1: Don’t Ignore Entire Interest Costs

You really desire to utilize refinancing as a manner to reduce the sum interest cost you pay. While that sounds simple in principle, it is sometimes hard to do. The interest costs you pay are a mathematical function of the interest rate, the loan balance, and the loan term period.

When people refinance, they be given to concentrate solely on the loan interest rate. But they often don’t pay as much attention to the loan term or the loan balance.

When you utilize refinancing—even refinancing at a lower interest rate—to addition your borrowing or to widen the clip over which you borrow, you often aren’t redemptive money.

Rule 2: Trade Expensive Money for Cheap Money

For refinancing to make economical sense, however, you do need to trade higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that volition be charged on your new loan—this is the best measurement of the new loan’s interest rate cost—and then compare this to the loan interest rate on your old loan.

You don’t desire to compare interest rates on the two loans nor do you desire to compare annual percentage rates on the two loans. Again, just to do this perfectly clear: You desire to compare the loan interest rate on the old loan to the annual percentage rate on the new loan.

When the annual percentage rate on the new loan is lower than the loan interest rate on the old loan, then you are truly paying a lower interest rate.

Comparing annual percentage rates with loan interest rates looks confusing at first. But short letter that you would pay only interest on your old or current loan, so that’s all you need to look at in terms of its costs. With a new loan, however, you would pay both interest and any inception or shutting cost fees. The annual percentage rate wrap ups the interest rate charges and apparatus charges, inception charges, and shutting cost fees into one interest rate-like number.

Rule 3: Don’t Lengthen the Repayment Period

Be careful that you don’t widen the length of clip you borrow by continually refinancing. For example, one common regulation of pollex states that every clip interest rates driblet by two percentage points, you should refinance your mortgage. However, there have got got been modern times in recent history when following this regulation would have had you refinancing your mortgage every few years. This could intend that you would never get your mortgage paid off. If you refinanced every few years, you would suddenly happen yourself still 30 old age away from having your mortgage paid.