In Arizona, much like the rest of the United States, mortgage refinancing is a means to an end. You would not do it if you are perfectly happy with your current home loan. But you want to reduce save more on interest in the long run, reduce your monthly payments, or build home equity more quickly, it is a tempting option.
However, understand that a refi can backfire if you apply for it when you are not supposed to or when you did not exercise due diligence. Before you refinance in Tempe, Chandler, Mesa, or Goodyear, remembers the rules discerning borrowers follow below.
- Count How Many Years Are Left in Your Current Loan
Timing is everything. The benefits of refinancing your mortgage depend on how deep you are into repayment. If you have had your fixed-rate loan for less than 36 months, you might be slapped with a hefty penalty by your original lender if you pay it off early. If you 80% done with repayment, resetting the clock might cost you more money.
If you have an adjustable-rate mortgage, refinancing it before the rate adjustment kicks in is wise. There is no telling whether your monthly payment will go up or down until your new rate is calculated. Since the change can be dramatic, despite being capped, strongly consider a refi to avoid the adjustment and switch to a fixed-rate loan.
- Pay Attention to the Mortgage Rate Movement Trend
As a general rule, you should pay off your current loan by taking out a new one only when the interest rates are dropping. A downward trajectory of mortgage rate movement encourages refinancing, for it could mean thousands or tens of thousands of savings.
However, interest rates could still go down even if they are already nearing all-time lows. Hear what pundits have to say to gain valuable insight about where mortgage rates could be weeks or months from now to maximize your savings.
- Calculate Your Overall Savings (Not the Monthly Payment Reduction)
Numbers do not lie, but they can be deceiving. Sometimes, paying less now means paying more over the long term.
If you refinance your mortgage to decrease your monthly payments by choosing a longer term, you might end up absorbing more interest even if you manage to snag a lower mortgage interest. Understand that you have already paid interest with your current loan, so take it into account to figure out whether a refi is a more financially sensible way to go.
- Determine the Break-Even Period
It is the point when you begin to save money. Realize that you need to pay regular closing costs and might have to deal with private mortgage insurance again if you pursue refinancing. Add these variables to the equation to specifically identify your break-even period if you get the new mortgage you want.
Mortgage refinancing can beneficial only if you comprehend how it works. Otherwise, you might fail to use it to your advantage and go through the trouble for nothing.