Just because mortgage rates are low, it doesn’t mean it is a wise financial decision to refinance. Knowing when to refinance and when NOT to refinance is a key part of investment strategy. Here are three things to consider before signing your name on the dotted line of a refinancing package.
Most borrowers are attracted to refinancing for two main reasons: 1) to save money on a monthly mortgage; or 2) to save money on interest over the life of the loan. These are both great incentives for refinancing, but if you aren’t getting a significantly better interest rate, at least one percent or lower than your existing rate, it probably just isn’t worth it.
“If you can shave one-half to three-quarters of a percentage point off your mortgage rate by refinancing, you should look into it,” says Greg McBride, CFA, chief financial analyst for Bankrate. “Just be sure the cumulative savings on monthly payments is enough to offset the costs of refinancing. If you’re planning on moving in the next year or two, it might not,” Bankrate reported.
Counsel with a Lending Studios professional or mortgage broker to study your current situation to compare both the refinancing costs AND the potential savings.
The process of refinancing isn’t cheap. There are application fees, origination fees, home reappraisal fees and sometimes extra mortgage points that get you that lower interest rate “bargain.” Do your homework! Our home refinance calculator can help.
To leverage real savings from refinancing, only commence the process if you plan to reside in the home for a few more years. If not, it may not make financial sense for you. The average refinancing process can take between several months to several years to break even or start to really save you money.
“You’ll spend an average of 2% to 5% of the loan amount in closing costs, so you need to figure out how long your monthly savings will go toward recouping those costs. For instance, it would take 30 months to break even on $3,000 in closing costs if your monthly payment drops by $100. If you move during that 30 months, you’ll lose money in a refinance,” Nerd Wallet said.
Lending Studios can help you determine when you’ll break even so you can calculate if refinancing is the thing to do.
Refinancing packages offer borrowers many different options. Choosing a refinancing package that will leverage your current situation depends on your current and future goals. Are you considering moving to an adjustable-rate mortgage, or to a fixed-rate loan that has a steady monthly payment. Is your goal to shorten the term of your loan from a 30-year to a 15-year and save on interest charges? Maybe you are considering refinancing to eliminate the need for private mortgage insurance now that you have achieved 20 percent equity in your home.
Most homeowners are interested in a straight rate-and-term refinance to lower a current interest rate and solidify a good repayment term.
Make a list of what YOUR goals and reasons for refinancing are to help you make a more solid decision.
Some homeowners are interested in what is called a cash-out refinance; they borrow more than they owe on the home to take the cash equity for other financial goals (paying off credit card debt; making home renovations; or some other costly expense).
Use our cash-out refinance calculator to help you decide if this is a good move.
Before refinancing a loan, perform this quick checklist:
Not all refinancing packages are the same. Make sure you examine all your lending options to uncover your best rate and the best terms, then gather a few quotes BEFORE inquiring with your current lender. Evaluating competitors’ rates before inquiring with your current lender about refinancing can help the negotiating process lean more in your favor.
Lending Studios is here to assist homeowners to determine their eligibility for loan refinancing. Our mortgage calculators are a great tool to gauge your readiness for particular types of lending products:
Refinancing will affect your current and future finances no matter what–make sure it affects you the way you want it to. Take the time to evaluate your situation with a professional so you better understand what your loan costs will be, what your new mortgage will be and whether or not it is worth it.
After evaluating your financial goals, if you are struggling to pay your mortgage each month and you don’t currently qualify for a conventional refinance loan, Fannie Mae and Freddie Mac refinance programs could help you work out your financial burden.
Reducing your monthly mortgage payment can build wealth, but if you determine that now isn’t the time to refinance, stay the course on your current mortgage payments and protect your credit so you’ll be ready to refinance when the time IS right.