Just like learning how to juggle, or dance the tango, refinancing a mortgage can be all about timing.
Choosing the right time to take advantage of deals can be tough when homeowners are constantly being told to 'Refinance now!' and get reminded that 'This rate won't last forever!'
It's important for homeowners to not be overly swayed by a chatty computer-generated animal or doe-eyed spokeswoman and make sure the time is right for them. When a borrower pays attention to the rates and makes note of the trends year after year, while keeping in mind their own unique personal financial situation, they might have an easier time deciding when it's right for them to refinance.
While it's up to the borrower to decide when the time is right, the Federal Reserve has provided a few specific instances of when it might not be a good time to refinance:
It has suggested a homeowner not refinance when they've had their mortgage for a long time. Due to the nature of repayment for most mortgages, the longer a homeowner pays their mortgage, the larger the portion of that payment goes towards the principle. Paying down the principle is what helps build equity. Depending on the deal, refinancing may start the amortization process all over again, making each payment slant more towards paying off interest instead of principle.
A prepayment penalty is often included in the stipulations of the mortgage agreement so the borrower is penalized for paying off a loan early.
Also, if the homebuyer is considering a cash-out refinance plan there's a chance they might get hit with a prepayment penalty. A prepayment penalty is often included in the stipulations of the mortgage agreement so the borrower is penalized for paying off a loan early. If the borrower is refinancing with the same lender, there is a chance that fee could get waived.
Other typical fees associated with refinancing include, without limitation, an application fee, a loan-origination fee, points, appraisal fee, inspection fee, title-search fee and title insurance, homeowners insurance, and more. Those amounts would then need to be factored in to the total prospective savings to ensure refinancing is still a good option.
The Federal Reserve has also suggested those homeowners planning to move in the next few years might want to consider holding off. Since refinancing often requires a stretch of time before savings are truly felt, if the homeowner is looking to move, there’s a chance they won’t end up seeing that savings.
It's important not to get swept up in speculation. Each homebuyer's situation is unique to them. Financial journalists can only offer up educated guesses on where they think the overall market is going. The timing aspect of refinancing requires many more variables to align than just an attractive advertised rate for a borrower to consider that time to be right.
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