If let’s say your interest rate is 6% but you want to refinance to 4% and it costs 2% to refinance, doesn’t that just make it the same number in the end? Google says the cost of refinancing is roughly 2-6% of the full loan. I don’t get how it makes it cheaper to refinance? Just seems like you’re paying the money upfront then. Please eli5! Feel like I’m missing something.
In: Economics
In addition to the interest factor, the other things to consider.
There are cash out redinances. In these instances, a homeowner can take advantage of any equity or appreciation that has built up since the original mortgage was taken out. Typically, this is done after many years of ownership, but can be done in other circumstances as well.
Lastly, in order to lower your monthly payment, you can stretch out a loan over a longer period of time than what you have remaining. So for example, if you are in year 15 of 30, you can refinance at 30 years at a new interest rate. What this does is take your remaining principal balance and stretch it out over an additional 15 years, essentially cutting your monthly payment in half. Yes, you will more to the bank in interest over the life of the loan, but some people are more concerned about their monthly budget.
So in summary three reasons why refinancing is a good idea:
The lower interest rate causes you to give less money to your bank over the life of the loan (and can lower your payment)
The equity in the house can provide cash in hand for emergencies or major renovations
The additional term, can significantly lower your monthly payment to help with budget issues.
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