Smart Loan Shop

Homeowners it seems are forever on the lookout for ways to cut down on their bills. And home refinancing has become the method of choice for many. But be careful before you jump into any deal. There are times when refinancing can end up costing you more than you save on your monthly bills. Let’s begin by examining when a new loan makes sense.

Start by looking carefully at your current loan. Do you have an adjustable rate? If so you may end up saving money by locking in a low fixed rate. The only time an adjustable rate is good is if you get the loan when rates are high. Having or getting one now however, with rates the way they are, is probably not a wise choice. Shifting to a low fixed rate can save you thousands over the course of the loan. Make no mistake, the rates will go back up eventually. That’s not a prediction, just a fact that rates change. When they do go up, it won’t bother you because you’ll be locked in at a great rate.

Do you have a balloon payment coming due soon? Often times these payments can sneak up on you, and you may not be prepared. If this is the case, refinancing can be a life saver. And if your current rate is even slightly higher than what the market rate is, looking into refinancing is a good idea. Even a small difference of 0.25% will make big difference when flushed out over the length of a 30 year loan.

Of course that all sound great but naturally there are some things to look out for as well. Carefully examine the closing costs. Refinancing is not free and some of the costs associated with it can be pretty significant. Once you know the costs, do some figuring to determine how long it will take to to recover that money from the savings you see each month.

The reason this is so important is because people rarely stay in one house for the duration of their loan. If moving is something you might be doing in the near future, you’re simply giving away money. You should be reasonably sure you’ll be in your current house at least long enough to make up what you spend in closing costs.

Also look at the potential pre-payment penalties on your new loan. Most new loans will have them, and the average cost is 2-5 years. If you will be moving and need to take out a new loan, this will be an expensive problem. It’s also a problem if you want the loan to be paid off early. So be sure to determine those pre-payment penalties and again, measure them against your monthly savings.

Lastly, be sure to take a close look at your monthly payment. Even with a lower rate your payment could go up if you plan on taking advantage of a cash out option. Sure you’ll have more money in your pocket right now, but your new loan will now have a higher balance. So even at a lower interest rate your payment could go up. Of course if the new rate is much lower, your payment may be lower even with a higher balance. This is a good situation to be in. You’ll have cash in your pocket and be making lower monthly payments as well.

The bottom line is that home refinancing can be extremely beneficial to your bank account, but it can also jeopardize your financial health if you make a deal under the wrong conditions or at the wrong time. Weigh out the fees, costs and potential penalties against your monthly savings. If you see this will work, then begin shopping for a lender. Don’t just take the first offer you get because there are a wide variety of terms and rates available. And be sure to get recommendations from friends and relatives as well. They’ve been through the process and can let you know if their lender is easy to work with.

Do this right, and it’s like money in the bank. Do it wrong, and you could be paying for years to come.

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