Consumers who aren’t sure about whether or not to refinance home loans should use their uncertainty as a type of wake-up call. You need to understand your present mortgage and how today’s interest rates could be of benefit to you. Other factors that will play a role in your decision about refinance home loan options include your present credit score and how long you plan to stay in your home.
You may have heard that if interest rates have fallen 2 points below the interest rate you’re presently paying, a refinance home loan makes sense. Actually, you don’t have to wait for a full 2 point drop to save yourself a lot of money in interest payments. Figure out how much a 1 and half percent drop could save you over the life of your loan, and you’ll probably be very impressed.
The reason homeowners avoid a refinance home loan for less than a 2 percent reduction in interest is due to the costs associated with refinancing. However, you can shop around for lower cost refinances and pay your costs up front to minimize these fees and avoid paying interest on them.
If you plan to move out or sell your home in the near future (say, within 3 years), a refinance home loan might not make sense, even at a 2 point reduction. Again, you must consider the costs of the loan, and the fact that you will be paying mostly interest on your new loan for quite some time, rather than principle, just as when you took out your first loan. This means that in 2 years time, you may not have built up as much equity in your home as you would have if you didn’t refinance. This will work to your disadvantage if you sell your home.