The Benefits of Mortgage Refinancing
Owning a home through mortgage financing is one of the largest financial commitments that you can make in life. Over time, mortgage loan interest expenses can subtract hundreds of thousands of dollars away from your bottom line over time. For relief, you may consider mortgage refinancing. When making the decision to refinance, you must weigh the benefits of long-term savings on interest expenses against the up-front costs of taking on a new mortgage.
Mortgage refinancing describes the process of taking out a new mortgage loan to pay off your current mortgage. With mortgage refinancing, your goal is to effectively lower your home loan interest rate and housing costs. To reduce interest rate risk, you may also refinance an adjustable-rate mortgage (ARM) into a fixed-rate mortgage. ARM interest rates shift alongside the strength of the economy, which can expose you to dramatic monthly payment increases. After refinancing into a fixed-rate mortgage, you can lock in a particular interest rate and budget around regular payments over the long term.
The Federal Reserve
You can monitor the federal funds rate through The Wall Street Journal as a benchmark for mortgage rates, before deciding to refinance. Banks make overnight loans to each other at the federal funds rate — so that each individual bank can meet its Federal Reserve requirements. For their mortgage loan offerings, banks charge a premium to the federal funds rate to compensate themselves for the increased risks of dealing with consumers. In recession, the Federal Reserve Board usually coordinates interest rate cuts to encourage people to take out loans, invest money, and stimulate the economy. You are more likely to benefit from the cost savings of mortgage refinancing, after a series of recessionary interest rate cuts.
Mortgage Refinancing Costs
According to the Federal Reserve, the costs of your mortgage refinancing may total up to be worth between 3 and 6 percent of your outstanding principal. To process your mortgage refinancing, the bank will charge loan application and origination fees. At closing, you may also be responsible for appraisal, inspection and title search fees. Additionally, you could owe pre-payment fees on your old mortgage — when you use the cash proceeds from the new mortgage to pay off the old loan.
You will pull up an online mortgage calculator and toggle through projections — to determine whether mortgage refinancing makes economic sense. With the mortgage calculator, you can input different variables for interest rates, fees, and time frame for paying off the home loan. Mortgage refinancing is beneficial when your long-term interest savings exceed your up-front closing costs. Mortgage refinancing can generate significant savings, if you can lower your interest rate by at least 1 percent and plan on owning your home for the next 10 years.