Mortgage Refinancing Rates

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What is the best early mortgage refinancing rate?

Current refinance rates are among the lowest in years. Now, does it mean it is time to refinance your mortgage? Obviously, the best mortgage refinancing rate is one that allows you to gain maximum savings.

Read on to find out whether early refinancing of your mortgage can benefit you.

Two major types of mortgage refinancing

Refinancing can be categorized into two main types:

1. Rate and Term – Refinancing is done to save money. This involves refinancing your remaining loan balance for one that carries a lower interest rate and a more manageable term.

2. Cash Out – This means you obtain a new loan for an amount that is more than what you currently owe. You save the difference or use it to get rid of other debts.

There are other reasons why some homeowners opt to refinance these include: settling a divorce, replacing a mortgage with an adjustable rate with one that carries a fixed rate, or to avoid paying CMHC mortgage insurance premium when buying another property.

Computing for the Break-Even Point

Total mortgage closing cost can run up to thousands of dollars. If you know your break-even point, you can easily determine if refinancing is a good option.

The break-even point is computed by dividing the total closing costs with your projected monthly savings.

For example, if the total closing cost is $3000 and you save $100 monthly, the break-even point is 30 months ($3000/100). If you do not intend to dispose of the house within the break-even time, then it would be best if you keep your existing mortgage.

The Term in “Rate & Term”

The above example of mortgage refinancing does not compute the total savings over the new mortgage term. If you opt for a new mortgage with a term of 10 years, refinancing cost may be more costly over the long term.

To cite an example, you have been paying $988 monthly for 3 years. Without refinancing, you’ll end up paying $239,520 for the succeeding 20 years. If you refinance, you could be paying $697 monthly to pay for the new mortgage in 30 years; $885 monthly if you intend to pay within 20 years.

In the given example, the assumption is you borrowed $186,000 with a 5% interest rate. After 10 years, you refinance the remaining balance of $146,000 at 4%. This is easier to achieve if you have a good credit standing.

Cash-Out Refinancing

You can use this type of refinancing to pay off your current debt, but you have to weigh its advantages and disadvantages.

If you use cash-out refinancing to erase your credit card debt, you’ll enjoy lower interest. However, you may pay more in interest in the long run because you will be paying the new loan at a much longer term.

Probably the greatest risk you will be taking is converting your unsecured debt into a secured one. Missing out on your credit card payments may cause you to receive threatening calls from collection agencies and a damaged credit rating. If you miss your mortgage payments, on the other hand, your home may go into a power of sale.

So, what is the best rate for refinancing early? Do the math. We have refinance mortgage online calculators you can use to determine the benefits in terms of savings and payment terms that you stand to get, and if these benefits are enough to merit an early refinance.

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