Using Refinancing for Mortgage Reduction
Chances are that no one wants to spend any of their free time figuring out mortgage interest rates, amortization tables, and other such facts and figures. However, using refinancing as a means to mortgage reduction can save a homeowner literally thousands of dollars over the life of their loan, so it is definitely worth it to set aside a weekend afternoon and pull out that calculator.
Just how does refinancing work as a tool toward mortgage reduction, and does it work for everyone? What exactly is involved in the process, and how do you go about refinancing your mortgage?
Keep in mind that the only way that refinancing is going to work as a means to mortgage reduction is if you are now eligible for an interest rate that is lower than your current rate. Or, if you have an adjustable rate mortgage that may very well reset to a higher rate that is out of your reach, and you can find a fixed rate mortgage that is less than that future rate. Knowing the exactly interest rate that you’re eligible for is the absolute first step toward refinancing as a mortgage reduction technique. If the interest rate is no lower than what you’re paying now, then it’s not going to save you any money whatsoever.
You also need to remember that refinancing incurs many costs and fees. Most lenders charge a prepayment penalty on the mortgage you currently have, and all the fees you paid when you got your first mortgage - appraisals, brokers, origination, you name it - will apply all over again. Refinancing won’t help you as a tool for mortgage reduction if all those fees add up to any amount more than what you save once you go through refinancing.
If you’ve done all the math and realize that refinancing will help with mortgage reduction in your case, your next step is to shop around for a new mortgage. It’s a good idea to start with lenders other than where you currently have your mortgage. Once you have some pre-qualifications from these other lenders, you approach your current bank and tell them your plans to use refinancing as a mortgage reduction technique. Because they will want to keep your business, they may very well offer you an interest rate that is at least a quarter of a percentage lower than what you’ve been offered by other companies.
Remember that even with pre-qualifications you’re not getting exact figures when it comes to your refinancing costs and fees. Once you tell your current bank of your plans to use refinancing as a mortgage reduction technique, then they will tell you exactly what all those fees will be and you can do all your precise math. Before you sign for that new mortgage, make sure that refinancing makes good financial sense for you. Again, the only way that refinancing works as a mortgage reduction technique is if it actually saves you money in the long run, over your current mortgage loan.
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