Timing the refinancing of your second mortgage is just as important as finding low rates and fees. Before you decide to refinance, make sure that you have a clear benefit. Either save money with lower rates or protect yourself with the security of a low fixed rate second mortgage.
When Lower Rates Equal Savings
Lower rates can equal savings if you have enough time to recoup any closing costs or other fees. In most instances, a point drop of two percent or more with seven years left on the loan makes it cost efficient to refinance. To see if this is true in your case, compare what you are paying now with the potential payment of a new mortgage.
Combining both your first and second mortgages will further reduce your rates and save on application fees. This only works if your primary mortgage has high rates currently.
Protect Yourself From Rising Rates
With an adjustable rate second mortgage, refinancing can protect you from rising interest rates. Even with caps in place, you could see your current loan period length, adding to your total loan costs.
Refinancing for a fixed rate home equity loan will provide you with the security of a regular payment schedule. In some cases, you may also find a lower fixed rate than your current adjustable rate.
Timing Is Important With Refinancing
With most home equity loans, you pay most of the interest at the beginning of the payment period. So by the last half of your loan, you are paying hardly any interest. To see the biggest savings, you need to refinance early.
If you plan to move soon, then you will also want to hold off on refinancing. While closing costs usually only equal 1% to 3% of principal, it takes a couple of years to regain these costs.
To see if you have a clear benefit to refinancing, start looking at loan quotes. Figure the potential costs of interest and fees, and compare them to your current second mortgage. Factor in your future financial goals, and you will have a good idea if refinancing is for you.