Should you refinance?

Homeowner’s frequently ask if they should refinance their home loans. Everyone is different, but if it makes sense to refinance, then yes, you should! So how do you know if it makes sense to refinance? Many think you need to drop your interest rate at least 1% but that isn’t always the case. Sometimes even dropping it a .25% may make sense. So how do you know?

You need to talk to a loan officer and find out what the interest rates are, see what the cost of a refinance will be and figure out what you are saving. Then figure out how long it will take you to recoup the cost of the refinance. Once you know that number, you can decide if it makes sense.

I always ask a few questions – the first one is how long do you think you will live in this home? If you are only planning to stay for another year or two, it doesn’t make sense to refinance – unless you are really dropping your rate a lot! Are you paying mortgage insurance? If so, will you have enough equity in the home to eliminate that payment? If you do, then even dropping your rate a small amount may it worthwhile to refinance.  Do you have an adjustable rate mortgage? If so, going to a fixed rate mortgage probably makes sense.  Do you have debt you want to pay off? It may make sense to refinance to pay off your debt.

So how do you know if it makes sense to refinance? If you have a $350,000 loan at 3.75%, dropping to 3.0% would save you about $150/month. It will probably take you about 3 years to break even with closing costs so it depends on how long you plan to keep your home. If you have the same situation and were paying mortgage insurance and can eliminate that payment, it will save you even more money and you will recoup the costs even faster.

Do you have a lot of credit card debt? It may make sense to do a cash out refinance to pay off the credit card debt -more than likely the credit card interest rates are around 20% and if you are not paying it off monthly, it’s adding up quickly. If you can refinance and pay that off, you will lower your monthly payments. If you do this, make sure you don’t charge up the credit cards again or you will be in the same position. Maybe you want to remodel your home? Again, it can make sense to do a cash out refinance to pay off the remodel. If you are increasing your payment, but also increasing the value of your home, it could make sense.

When does it not make sense to refinance? If you have had your mortgage for a long time, you may decide it doesn’t make sense – maybe you only have 10 years left. Look at the new payment, consider a shorter term mortgage and see what the savings would be. It may not make sense to spend the money on closing costs.

If your credit score is too low to get a good rate, you may want to work on your credit before you try to refinance.  Your income may be too low due to covid and that could affect your ability to refinance. There are some that want to refinance but have changed their income and are no longer eligible – at least not yet. If you recently became self employed, you will need a two year history before you can qualify for a new mortgage.

Interest rates are still great – we know they will be moving up over the next few months but no one knows exactly how fast they will increase. If you have not refinanced in the last year, you may want to talk to your loan officer and decide what makes the most sense for you.

Leslie Vanderwerf,  NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website

Written By

Currently a Senior Loan Officer at Cross Country Mortgage LLC, it's hard to believe I have been in the mortgage business for more than 25 years and have worked with Sharlene since 2000! I love sharing mortgage insights here each week and helping people finance their homes. Listening helps me find the right program for you!

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