San Diego Mortgage and Home Buying Tips
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San Diego Mortgage Refinance Advice
What is the purpose of refinancing a mortgage loan and when it is the right thing to do?
If you’re considering a San Diego mortgage refinance in the near future, this question is probably on your mind a lot. Refinancing a home mortgage loan can be a wise financial move for certain homeowners in certain situations. But it’s not the right thing to do in every scenario.
Refinancing a Home Mortgage Loan
Later in this article, we will discuss the scenarios where it makes sense to refinance your San Diego mortgage loan. But before we get to that, let’s briefly define what exactly a mortgage refinance is — just so we are all on the same page. Basically, refinancing a home mortgage loan means that you are “replacing” your current mortgage with a new one — ideally, at a lower interest rate.
Let’s look at a hypothetical example:
Let’s say you have improved your credit score quite a bit since you took out your first mortgage loan. As a result of your improve credit, you will probably qualify for a better interest rate on a new mortgage loan. In that case, you can pay off your old San Diego mortgage with a new one, and enjoy the benefits of having a lower interest rate on the new loan.
Of course, this lower interest rate also means that your overall mortgage payment will be lower each month. This is the primary reason why most San Diego homeowners refinance their mortgage loans in the first place.
But will the money you save by refinancing make up for the closing costs you pay on the new loan? Aha! Now we are getting to the next question you should ask about your San Diego mortgage refinance — when does refinancing make the most sense, financially speaking?
When to Refinance a San Diego Mortgage
Moving right along. Now that we have a better understanding of what refinancing means and how the process works, let’s talk about when it makes sense to refinance a home mortgage loan.
As a rule of thumb, it’s usually a smart time to refinance if the interest rate on the new mortgage will be two percentage points below your current interest rate. In these situations, the money you save each month (by paying a lower mortgage payment) would be greater than the upfront costs of refinancing the mortgage (origination fees, etc.).
In other words, the money you save from refinancing (over the life of the new loan) would exceed the money you spend on refinancing.
Another common scenario when San Diego homeowners refinance a mortgage occurs when the homeowners trades their adjustable rate mortgage (ARM) for a fixed-rate mortgage loan. Turn on the news on any given day, and you’re likely to hear about the current foreclosure crisis. This “crisis” is partly due to ARM loans that are adjusting and catching the homeowners by surprise with much higher interest rates.
Many San Diego homeowners in this situation have refinanced their mortgages as a way to switch from an adjustable rate to a fixed rate. No more surprises!