Your home or condo, provided
you own it, is probably the biggest
source of equity in your personal finance portfolio aside from
stocks or investments. With the cost of so many basic life
necessities going up such as fuel, food and health care, it may
be tempting to refinance to lower your monthly payments in order
to free up some cash to cover other monthly expenses. Or you
might be considering refinancing to tap into some of the equity
you have built up over the years to help pay off other debt. But
in doing so, you will basically be diminishing the resale value
of your home.
Of course there may be instances in life where it becomes
necessary to refinance or cash in equity in your home, and in
those cases then you simply need to do what is best for your
individual situation. Always shop around for the best interest
rates possible and don't rush into a contract because you think
you'll free up some cash quickly. Lowering your monthly payments
only to face a large balloon payment later on may seem like a
good deal right now. But while that balloon payment may look
smaller from the distance of a few months or even years, it
could seem like a mountain when faced up close when it comes due.
The same basic rules of thumb apply no matter what your reasons
though, and a few common scenarios for refinancing are covered
in the following paragraphs.
The most logical and common reason to refinance your home is for
a better interest rate on the loan. Most experts will tell you
that you won't save money unless the new rate is at least two
percent lower than your current interest rate. That magic number
is the lowers one that will generally let you recoup fees
incurred during the refinancing process and let you break even
again in a couple of years for most loans so that you can then
start to reap the interest savings.
If you've recently bought a new condo that came with a
pre-construction discounted price or bought a unit in a building
that has the potential to increase in value, such as the much
publicized http://www.bestchicagocondos.com/pre-construction
-condos/chicago-spire.html then you also may be able to
negotiate for a better mortgage rate with a different lender.
If you currently have an adjustable rate loan or mortgage and
are concerned that your rates will increase beyond your ability
to pay, then you may want to shop around for a fixed rate even
if that may be a point above what you are paying now. Paying
slightly more over time may not be a savings, but it could save
your home or lifestyle if your monthly payments increase to the
point that you end up in default on your loan and lose your home
to foreclosure.
Another reason some people chose to refinance is to shorten the
loan time frame in order to pay it off more quickly and build
equity faster. But besides the obvious desire to lower your
interest rates, you also need to be certain you'll be able to
handle the increased monthly payment amount that will come with
a shorter time frame.
There are also some home owners who decide to go with the
balloon payment mortgage just to make the most of the lower
monthly payments and gamble on being able to refinance before
the lump sum balloon payment comes due. This type of mortgage
flipping isn't recommended, but for some it can be worth the
risk and allow time to use the money saved from lower monthly
payments to be invested in other areas.
Something else you should consider before refinancing is how
long you plan to stay in your home. If you are planning on
living there for at least five more years, then it may be worth
while to shop around for a better loan rate. But if you think
there is a chance you might sell you condo or home within five
years, then it probably isn't worth the added cost of
refinancing fees or closing costs. And be sure to check with
your current mortgage or loan holder to see if there is an early
repayment fee. Sometimes you can even negotiate a better rate
with your current mortgage holder and most likely make the
process much simpler than if you started from scratch with a new
lender.
All in all, the most sound advice anyone can give you about
refinancing is to take your time and try to find the best rate
possible for the loan. Don't forget to ask about closing costs,
title insurance, fixed rate versus adjustable rate, prepayment
fees or any other fees over the life of the loan. Truly, the
only ignorant question is the one you didn't ask before signing
the contract.
About the author:
Paula Cherrist writes articles about Chicago real estate, home
trends and housing related topics for Best Chicago Condos.
