If you want to refinance your mortgage more than likely you are considering it hoping that it will save you money on your mortgage. Refinancing can save you a buck or two but it can also cost you, so don’t jump into a refinance until you know that the move will, in fact, benefit you financially. However, when done correctly, a refinance can be a great way to save money on your monthly payment as well as the overall cost of the loan. Here are a few tips that can help you save money with your refinance.
Refinance Rates and APR’s
When refinancing, the first question you want to ask yourself is whether or not the refinance rates available to you are lower than the rate you currently have. If the competitive rates today are significantly lower than the rate you were locked in at, it may be worth considering the refinance. Keep in mind that the interest rate and annual percentage rate are two different things, and both of them will have an impact on the amount of money you pay out over the life of the loan. When you do your calculations make sure you calculate the effects of both numbers, so you don’t think you’re getting a great deal only to realize you are not.
The interest rate is especially helpful if you are looking to refinance from an ARM loan to a fixed loan. Most of the time if you are trying to locked in a fixed rate you do so intending to live at the home for an extended period of time. By switching to a fixed rate you can lock in a low interest rate for the life of the loan, regardless of the fluctuations that come up in the market. ARM loans are the opposite. They adjust with the market trends. Sometimes the rate is low and sometimes the rate is high. If you’re looking to save money on a long term mortgage, get a fixed rate loan. It will be worth it to have a mortgage payment that doesn’t shift. However, when you know that you are going to be in the home for a short period of time, locking in an adjustable rate mortgage can mean lower interest rates for the first few years, which is considered short term. By the time the rates adjust, you might be gone. The ARM loan is worth considering when you know you are looking at a short term stay.
Refinance Your Mortgage to Save Time
One of the best things about the refinance is that it can help you shave years off the loan. Most of the time homeowners lock into a thirty-year-fixed loan, which means that they will spend the next thirty years paying off the loan. By the time the loan has been paid for the homeowner has paid twice or triple what the original loan amount was just in interest payments. Every loan has an amortization schedule. If you’re wondering how much you will pay when you refinance your mortgage by the time your loan is complete, see if you can get the schedule. It will show you the amount of interest paid monthly vs. the amount of principle. You’ll see that the amount of principle paid is much less than the interest.
The amortization schedule is a great way to show you how much you can save if you adjust the terms of the loan from a thirty year to a twenty or fifteen year term. Many homeowners switch to this option when they come to a place financially where they have extra income every month. This extra income can be put toward the mortgage payment, which significantly reduces the amount of interest paid over time. It’s not uncommon for a homeowner to save money by switching to a shorter term loan. However, this is not always the case so you’d be wise to find a decent refinance calculator and plug in your loan terms before you refinance your mortgage. The calculator will give you a fairly accurate assessment as to the amount you can save.
If you’d rather not refinance into a shorter term loan, but you want to refinance to change your interest rate, do so. You can save money on the mortgage if you put a couple of hundred dollars toward it every month in addition to the mortgage payment, especially after getting a lower interest rate. When you are able to do this faithfully every month, the mortgage amount will drop much more quickly. Homeowners can shave years off of a thirty year fixed loan by putting extra toward the payment.
Refinancing has many pros and cons. It is a financial move best discussed with an expert so you can go into it armed with the tools you need to make it work for you.