When you refinance mortgage loans, you spend hours on paperwork and meetings, and spend thousands of dollars on refinancing fees. So when you refinance mortgage loans, how do you soften the blow to your wallet?
* A lower interest rate. The interest rate determines how much extra you pay over the term of the loan, and can amount to more than the value of the mortgage itself. For instance, if you are paying 7.5% on a mortgage of $200,000, you will pay $303,434 in interest. Thats 152% of the value of your house, on top of the money youre paying to cover the capital. Lowering your interest rate by two points, to 5.5%, lowers your interest payments to $208,808 and saves you $94,626. That far outweighs a couple of thousand dollars in refinancing fees.
* A longer loan term. A longer term will raise the total amount you spend, but lower your monthly bills, an important consideration when you are strapped for cash. With a 15 year term, a $200,000 mortgage with a $6.5% interest rate costs $1,742 per month, but you can drop your payments to $1,264 by lengthening the term to 30 years.
* A shorter loan term. If you are more concerned with the total amount you pay than with the size of your monthly payments, a shorter loan term will save you money. if you have an interest rate of 6.5% and a term of 30 years on a mortgage of $200,000, switching to a 15 year term can drop the total cost of your mortgage from $455,089 to $313,599.
* Changing the type of loan. Switching from an adjustable rate loan to a fixed rate loan when you refinance mortgage loans can lock in a much lower interest rate. This is particularly true in situations like that of July 2009, with low interest rates beginning a long climb back to their previous heights. On the other hand, if interest rates are due to fall, moving from a fixed rate mortgage to an adjustable rate mortgage will let you take advantage of lower interest rates. If you need to weather a short term financial crisis, you may prefer to lower your monthly payments as far as possible by choosing a non amortizing loan like a balloon loan.
Deciding to refinance mortgage loans is no small decision. As with any refinance, mortgage refinances are a stressful process with a large initial outlay. However, if your current mortgage locks you into a high interest rate, high monthly payments, or a high total payment, deciding to refinance mortgages can be an excellent decision.