When you buy a house, chances are you search for the best deal available at that current time. By that, we don’t just mean finding a property you love, but also getting a mortgage that you can live with over the next 25 or so years. When it comes to securing a mortgage, you are pretty much tied to the interest rate that is available at that given time. While it may not seem so bad when you sign on the dotted line, that mortgage payment can look pretty huge when the interest rates drop significantly years later.
Many people faced with that situation simply choose to suck it up and stay with their current mortgage and interest rate, but many more see it as a chance to refinance and cut their monthly payments. That is the biggest benefit of refinancing your mortgage, with monthly payments often dropping by a couple of hundred dollars each month, depending of course on the difference in interest rates. That is not the only reason that people choose to refinance, though, with time also playing a part in the decision.
There are some folks that look at shortening the amount of time left to clear off their mortgage. The way this works is that they refinance at the lower interest rate, but reduce the number of years left on the loan. This way they can still maintain the same monthly payment they are comfortable with, whilst shaving years off the time it will take to pay off the mortgage. When you consider how much of you payment is actually interest, taking this route has the potential of saving you tens of thousands of dollars over the course of your mortgage.
There is also a way to refinance your home that can put much needed money in your pocket. A cash-out refinance allows you to basically withdraw funds from any equity you have in your home, which may come in handy if you are looking at doing some renovations around the property. While each of the options we have discussed sound great, there is a downside to refinancing that may not seem that apparent until you examine the details a little closer.
The first thing you need to consider is how much it actually costs to refinance your mortgage. This is not a move that comes cheaply. You need to weight how much you will save by refinancing against how much it will cost to do it in the first place. If the difference is such that you will recoup the costs quickly, then it may be worth looking into. If, on the other hand, it will take a considerable amount of time to recover your expenses, you need to consider whether you can actually afford to go with the refinance in the first place. The other thing you need to look at is the possibility of foreclosure. If you refinance and foreclose at a later date, the financial institution you got the mortgage through may be able to come after you for the money they are still owed after they sell the property.