This is a guest post written by Betsy Fallwell

Looking for a quick, easy way to shave hundreds of dollars off your monthly budget? Then here’s the one word you need to remember: Refinance. Refinancing your home’s current mortgage – and taking advantage of today’s historically low rates – can help put more money back in your pocket.

Reasons to Refinance

For most people, the main reason to refinance is pretty simple – you’re looking to save money. But there are a plethora of legitimate reasons why refinancing could be a smart move for you. Consider a loan refinance if:

• You’re looking to renovate your home. A cash-out refinance uses the equity you already have in your home to pay for upgrades or repairs, usually at a lower rate than a home equity line of credit.
• You need to pay off debt. Not only can you save money to pay down debt by lowering your monthly mortgage payment following a refinance, but pulling cash out during the process can give your liquid assets a boost.
• Getting out of a bad loan. Whether your current loan has a high interest rate or the introductory period on your adjustable rate mortgage is about to expire, refinancing permanently separates you from your old loan.

 

Researching Loan Products

There is a wide range of home loan products available on the market. One of the most popular loans is the fixed-rate mortgage, which comes with a stable interest rate for the duration of the loan’s term – typically between 5 and 40 years.

Adjustable-rate mortgages, called ARMs for short, have an introductory period that comes with an ultra-low interest rate; however, once that intro period – usually between three and ten years – ends, your interest rates will vary depending on market conditions, making your payments vulnerable to drastic changes.

Interest-only loans allow you to just pay the interest on your loan for a set introductory period, giving you very low monthly payments for a while; after that period ends, though, you’ll have to pay the interest as well as the principal on your mortgage, leading to far higher payments.

All three of these loan types are available to those looking to refinance, as well as those buying a new home.

How do you know which loan is right for you? A mortgage calculator can be an effective home loan comparison tool, helping you discern what your monthly payments will be at the start of the loan’s term, and throughout it as well. But having the right kind of professional help is crucial, too.

Working with a Pro

Before you head to your bank or credit union to refinance your home, consider working with a mortgage broker instead. These professionals act as a liaison between borrowers and lenders. Unlike a financial institution, which will push in-house mortgage products, a mortgage broker is free to show you a range of loans from a variety of lenders. This is one-stop shopping, saving you time and energy.

A mortgage broker won’t add to your costs, either. Federal law prevents brokers from collecting fees from lenders and borrowers, and since most mortgage companies pay brokers’ commissions on the products they sell,  you can work with one of these pros for free, whether you ultimately buy a loan through them or not.

Caveats to Refinancing

Sure, a refinance can save you lots of money, but it’s not all clear sailing. If you’re not planning on staying in your home long-term, the closing costs you’ll pay on the refinance could outweigh the reduced monthly mortgage payments.

An even bigger problem amidst today’s housing market is depreciated home values. Lenders require borrowers to get an appraisal on their home during the approval process. If your home’s value has dipped because of the housing crisis, you may not have enough equity – at least 20%, typically – to avoid private mortgage insurance, or PMI, even if your original loan did not require it. This additional insurance can add to your monthly housing expenses, negating some of the savings from a lower interest rate.

 

Photo credit: james.thompson