Refinancing your loan may turn out to be a good or bad choice depending on how you have timed it. Before signing the refinancing documents, ask yourself whether the option is really necessary for you. It may be vital if you are looking to benefit from the following scenarios:
Benefiting from lower rates: As a rule of thumb, if you are being offered an interest rate that is 2% lower than what you are currently paying, then it’s best to refinance. Think hard however, as every case is unique. Discount points you have or the prepayment penalty you have may in fact make refinancing expensive.
Reducing your debt burden: With your home loan, if you are also paying other loans, then refinancing may be a means of consolidating your debt. It is an especially good idea if you already have sufficient equity in your home. It will help keep extra money in your account every month, but you have to be prudent in your expenditures.
Increase cash flows: If you are in need of more liquidity with your everyday finances, then refinancing a loan will give you extra money in hand. This way, you don’t have to pay with credit cards, so you avoid the vicious cycle of debt.
Consider your taxes: If you are planning on refinancing your loan, even 203K loans, you need to understand how it will affect your taxes. You may make the move happy to pay lower interest rates, but you may end up paying higher taxes. Consult your auditor to get a good idea of what to do.
30-year fixed – the interest and premium payment remain fixed for 30 years giving you the ability to work out your personal finances accordingly.
15-year fixed – Here too the interest and premium are fixed for 15 years. The only difference is that your monthly payments will be higher.
ARMS – here interest rates change according to pre-fixed time frames. The shorter initial time frame you opt for here, the lower your rate will be.
Interest only: This is where you pay only interest for a fixed number of years moving on to a full loan repayment at the end of the period. Or you may choose to refinance.
Payment options: This gives you a choice in the kind of payments you make. You may choose to pay varying amounts each month, opt for low interest payments or only-interest payments or even interest and principal together each month.
Balloon: These are fixed short-term options, and you can choose from 3, 5 and 7 years. During these periods, you pay a mix of both interest and principal. When the tenure ends, you may choose to refinance if paying the remaining balance is not a choice.
The loan process in each of these cases is similar to what you undertake the first time you apply for a loan. As a first-timer, you were probably like the millions of others who settled for the first option that came their way. It is important to look at the larger picture of your personal finances when making the decision. Now, with experience on your side, you will be able to make an informed decision and choose the refinance loan option that will work best for you.