Refinancing: to do it or not? – it is the same complex question as how to choose the moment to go into the stock market. You should catch the lowest rate possible but nobody stops in life. Especially, if we are talking about young people who are trying to plan their financial future. Let’s try to figure out when to sign the documents and when to close the calculator.
First of all, there must be quite a significant decrease in interest rates from your previous loan, at least 0.75% to 1%. In addition, one has to consider the period of time he spends in the house. If you think about changing it for another within two years, in the majority of cases, refinancing will bring you extra expenses.
In any case, you need to calculate your break-even point. Closing costs amount to several thousand dollars and can ruin the whole deal. For example, if your savings per month equal $200 and you paid $4,000 for the closing, it will take you 20 months to receive the initial amount of money back. To put it briefly, if you are thinking about moving somewhere else before that time, the bank wins while you do not.
Changing the term of the loan from 30 to 15 years may be good for you concerning the amount of interest you will pay. Yes, your payment will increase but, on the other hand, you will build equity in your house much faster. It is a good choice for people who are sure about their income and are trying to buy a house faster without any debt. Remember, though, that you have to have extra money in the budget to bear this extra monthly cost easily.
Cash-out refinancing, when people borrow more than the balance of their mortgage for some purposes (like home renovations or debts repaying) looks like a very attractive deal. It seems to be an easy and quick way to get some money but, in practice, it means that you set your balance of mortgage to zero and start from scratch.
The biggest disadvantage of refinancing a 30-year mortgage is the possibility to begin the whole process from the very beginning. During the first period of the amortization schedule, you will just pay the interest and nothing else. It means that you are running around the treadmill and the loan balance will remain almost the same during the first years.
It is quite hard to predict the future in people’s lives, especially at the beginning of marriage. Some job loss or unexpected expenses may cause you some problems in making payments in the future. Make sure you have some kind of reserve ready before you make another financial commitment.
In general, you should remember that refinancing will work well only in case you have a plan and your future is stable. Relax, make some calculations several times and order yourself a pizza.