When you’re paying for mortgage, every other living expense pales in comparison. After all, you can go hungry for a day or two, but nothing’s worse than not having a roof over your head. However, mortgage payments aren’t necessarily cheap. This is why many homeowners are perpetually looking for opportunities to reduce payments. And of course, when they find it, they can’t resist taking advantage.
What they don’t realize is that jumping in too quickly may not be the way to do it. Why? Because according to research done in the early 2000’s, it was shown that the common decision-making process of whether to refinance or not is too simplistic. Simply put, homeowners think that by taking advantage of the numerous ads advertising refinancing saves them money. But it really doesn’t in the long run.
That doesn’t mean that refinancing is bad. It only means that by properly understanding what refinancing means, and making use of more sophisticated models, homeowners can wait for bigger savings that will be better in the long term.
How can homeowners make the most out of refinancing?
1. Refinance when you start seeing savings.
With the help of a financial planner, compare expected monthly payment reductions against the cost of refinancing. A good rule of thumb is to replace the current mortgage only if the saved amount exceeds the cost of the refinancing by a good margin.
2. Don’t refinance too early.
This is related to tip number 1. Many homeowners will be tempted to refinance even if the saved amount is just very minimal. After all, who really wants to turn down free money? As little as it may be, it’s still savings, right?
Well, it is. But over 30% of borrowers are saving less because they choose to refinance too early. By waiting for the right time to refinance, you can actually save more money in the long run. Refinancing now can mean saving $25 from monthly payments. But waiting a few more months could allow you to save $50 to $100 if the rates keep falling.
3. Stay away from balloon payments.
Balloon programs are very attractive because they can lower initial monthly payments and rates. Unfortunately, many homeowners do not realize that the entire mortgage balance could be due in as little as 5 to 7 years. That’s usually when the fixed rate ends. Refinancing can save you from the pitfalls of a balloon payment.
4. Cash out.
Most homes increase in value over time. This means homeowners have the opportunity to use that as extra income. Cash-out mortgage refinance transactions are easy and they also have the benefit of being tax-deductible.
5. Cancel private mortgage insurance (PMI).
As the balance on the home decreases, the home value increases. Borrowers can then cancel the PMI when they refinance the loan. That should also save you money with the lower repayments.
6. Consolidate your debts.
If you have a home equity loan and a first mortgage, refinancing will allow you to merge the two. You can get one fixed rate mortgage that levels the payment over the loan term.
Ideally, you should refinance when the interest on the mortgage can be lowered thereby lowering the monthly repayments. You also want to refinance if the loan term will be shortened and can be paid off in a year or so. And remember, it is strongly advised that you consider all the pros and cons of refinancing before making that final decision.