With interest rates dropping lower than they were last year, many homeowners are thinking about refinancing. Is it something you should think about? Here are some questions to ask yourself before you decide to refinance.
Why do you want to refinance? There are many reasons but here are the most popular reasons:
- Lower your interest rate and payment – If you have a 5% interest rate or higher, it might be worth seeing if you can take advantage of the current lower interest rates, to reduce your monthly payment and overall cost of the loan.
- Shorten the term of your loan – If you have a 30-year loan, it may be advantageous to change it to a 15 or 20-year loan to pay off your mortgage sooner. You may be able to shorten the term of your mortgage and keep your payment close to what it was.
- Cash-out refinance – With home prices increasing, you might have enough equity to cash out and invest in something else, like children’s education, a vacation home, a business or maybe remodeling your current home.
So once you have decided that you want to refinance, you need to look at what it will cost you and see if it makes sense to do. Typically it will cost somewhere between 2-4% of your mortgage amount in closing costs. You can roll the closing costs into the new mortgage as long as you have enough equity. Another option is a “no cost” refinance. Basically a no cost refi means you are using a higher interest rate to pay your closing costs. Some people will do a combination of that – maybe use a higher rate to avoid an origination fee (or points) and cover some of the fees, then roll the remainder into the mortgage. The last option is to pay cash to cover the costs.
Once you know what the cost is, you need to decide if it’s worth refinancing. Find out what you will save every month and what it will cost to refi. Then figure out how long it will take to break even. For example, if you have a $200,000 mortgage and you are going to lower your payment by $100, look at the closing costs. If your closing costs are $3000, it will take you 30 months to recoup your costs. As long as you plan to keep the house (or mortgage) for at least 2.5-3 years, it may make sense to refinance. However if you think you will sell the home in the next five years, you may want to wait and save the money you would spend on refinancing to use on a new home.
Think about your plans, how long you will live in the home and the cost to refinance. If it makes sense to do it, then call and talk to your loan officer. Look at your options and see what works best for you. For some it makes sense to refi, for others, it may make more sense to wait and save the equity in your home.
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
