4 Things To Consider Before Refinancing
Mortgage rates are reaching record lows; because of this, many homeowners are considering refinancing. However, there are a number of factors homeowners should consider before refinancing.
What is refinancing?
A refinance is a new mortgage that replaces an existing loan. Refinance loans are typically done so homeowners can get better rates or more advantageous terms. Refinanced loans can be customized with the amount borrowed, rates, fees, and loan length. Other reasons for refinancing can include switching from an adjustable rate to a fixed rate mortgage or cancelling private mortgage insurance.
Refinancing also offers homeowners the chance to cash in on the equity they have built in their home. This cash payout can be used to pay off other debt, fund home improvements, or build up an emergency fund.
Things to consider before refinancing
While low mortgage rates may be tempting, there are a number of factors to consider before refinancing.
Your current interest rate
In general, refinancing is a good idea if it will reduce the mortgage rate and monthly payment of a loan. While some experts say homeowners should only refinance if their rate drops by at least 1%, even a small change in percentage can make a dramatic difference in monthly payments. However, someone with only a small balance remaining on their loan may need to reduce their rate by 2-3% to see a change in their monthly payment.
The cost to refinance
Closing costs and other fees should be taken into consideration before deciding to refinance. For example, if refinancing lowers a monthly payment by $100 but has a loan origination fee of $5000, it would take 50 months to recoup the cost of refinancing; unless the homeowners planned to remain in their home for more than 4 years, refinancing could cost them more money than it saves. However, if the refinance saved $200 and only cost $3000 in closing fees, the cost would be recouped in 15 months. Likewise, some lenders offer no-cost refinancing options that exchange slightly higher interest rates for no closing costs.
Effects of paying the loan longer
If a homeowner has paid 6 years on a 30-year mortgage, refinancing with a 30-year loan would extend the number of years they are paying for the loan. For some homeowners, this extended loan term is worth it; the amount of interest paid over the additional years, as well as if any additional payments will be made, should all be taken into account.
The equity in your home
Most lenders will want to verify the amount of equity in a home before approving a refinance. In general, the more equity homeowners have in their property, the easier it is to refinance. However, even those with little equity – or those who are underwater on their mortgages – may be able to refinance with the current historic-low rates. FHA Streamline refinance, HARP, and VA IRRL programs all allow homeowners to refinance with little equity to no equity.
by Author, March. 26, 2020