In the last few weeks I have had several clients call me about refinancing. There are definitely times that you should refi and there are reasons not to do it. There may be people that couldn't refinance a year or two ago, but may be able to now. Here are some reasons to refi -
-Lowering your interest rate. If your rate is higher than the current mortgage rates, it may be worth looking into refinancing. It depends on a few things but look at what the cost is and how much it will save you – then you can make an informed decision on whether it makes sense to refi now.
-You do not plan on moving anytime soon. If you know you are not moving and you want to work on paying off your mortgage – it may make sense to refi to a shorter term (a 10 or 15 yr term) and pay off your mortgage sooner.
-You need some of the equity in your home. As home prices have increased in the last year, so has your equity. If you need to make some repairs or have an emergency come up, doing a cash out refi may make sense.
-You have an adjustable or interest only mortgage. If you have an adjustable rate mortgage, chances are good that the rates have been dropping but after this year, they may start to increase. If you have an interest only mortgage and do not plan to move soon, this would be another reason to look into refinancing. Rates are still really good, we know they will start to increase, why not lock that mortgage into a fixed rate mortgage while the rates are still low?
-You need to remove someone from the mortgage. If you have been divorced or had bought your home with someone else and have now split up, you may have to refi to take that other person off your mortgage. The only way to take your name (or someone else's) off a mortgage is to sell or refinance. A divorce decree may say you are no longer responsible for the mortgage, but it will still continue to report on your credit report – that will affect your score. If you are not in the home and no longer responsible for the home, you want the other person to refi to get your name off the loan. This is a great time to do that as home prices have increased to give you some equity and rates are still low.
Whenever you think about refinancing, always look at the costs and how long it will take to recoup those costs. I talked to someone yesterday that wanted to go to a 15 yr loan, it really didn't make sense for them to do that. Their payment would go up and they would only save about 14 months on the loan – it made more sense to keep paying a little extra and not have the cost of the refinance. I heard a loan officer talk about how they saved someone two months of payments on their refi – they really didn't save anything – they just didn't have to make the payments. They timed the closing of the refi so they could avoid the payments, but they still have to pay all the interest. They also didn't pay down the principal like they would by making one of the payments.
If you aren't sure about whether it makes sense or not, talk to your loan officer. If you feel like they are pushing you to refi without really explaining the costs or the benefits, talk to another loan officer. I have frequently had a discussion with my clients where we decide that it really doesn't make sense to refi now and I will tell them that another loan officer may make it sound like it is a great time to refi – nothing has changed, but maybe that loan officer isn't looking out for their client as they should be.
The quick way to figure out if it makes sense is to see what the cost is (money you are paying out of pocket and money that is added to your current mortgage), see how much you are saving every month and how long does it take to pay those costs back. If you are going to be in the home for longer than that, it may make sense to refinance.