There are a number of different factors to look at to determine whether refinancing your mortgage is a good idea.
PUBLISHED ON | Wednesday, April 18, 2018
A lot of homeowners choose to refinance their homes in an effort to obtain lower interest rates. By reducing their interest rates, they can not only reduce their mortgage payments every month, but they can also lower the total amount they ultimately will end up paying. Refinancing a mortgage is rarely as simple as that, however. There are a number of different factors to look at to determine whether refinancing your mortgage is a good idea. Consider the following eight questions before you go through with your decision to refinance:
Check the terms of your original home mortgage. Some lenders include pre-payment penalties. The way refinancing works is that you will take out a second mortgage to pay off your first mortgage. Lenders may include a pre-payment penalty because, if you pay off your mortgage in one payment, they'll lose out on a lot of potential interest. If the pre-payment penalty is severe, refinancing may not being worth it for you. You'll have to do some math to work out how much you would save by refinancing in order to compare that number to the pre-payment penalty.
If you're planning on moving within the next couple of years, then the money you save might not be enough to offset the costs of refinancing. These costs include the mortgage application fee, the appraisal report, the loan origination fee, the document preparation fee, the title search, the title insurance, the recording fee and more.
There are two main reasons homeowners choose to refinance: to pay off their mortgage sooner or to lower their monthly mortgage payments. If you want to pay off your mortgage sooner by switching from a 30-year to a 15-year loan term, then make sure you calculate the interest. You might think you're saving on interest by financing to a shorter term, but if the current interest rate is higher than your original rate, you may end up spending more.
If you're just trying to lower your monthly mortgage payments, then you have two options. You can refinance to take advantage of a lower interest rate or you can refinance to extend your loan term. Again, you will need to do the math. Even if you switch to a lower interest rate, you may have to pay more on interest. For example, if you're 10 years into paying off a 30-year mortgage and you refinance to another 30-year mortgage with a better interest rate, it'll take you a total of 40 years to pay it off. Because interest is paid before the principal, there's a chance that you'll barely made a dent in the principal of the loan. By beginning to pay off the new interest all over again, you may pay substantially more in interest despite the more favorable rate.
The other option would be to refinance in order to extend your loan term. For example, if you had a 15-year loan, you could refinance to a 30-year. Just keep in mind that even though this will lower your monthly mortgage rates, you'll probably spend more over the long run.
Even if the current interest rates are much lower than the interest rate on your first mortgage, you may not even qualify for them if your credit history is in poor shape. Check your credit history and make sure you have a strong credit score before you attempt to refinance.
If you've been living in your home for a while, double check to see what its value is. If your property has declined in value, then it may not be worth refinancing. You will be refinancing on the original loan amount, not the current value of the house, after all.
If you don't have at least 20 percent equity in the house, you may be forced to buy private mortgage insurance if you didn't have it already as part of your original loan. If you didn't have private mortgage insurance before, you'll likely be required to buy it in order to refinance, and it may not be worth that additional cost.
If you've done the math and determined that refinancing is a good option, you might still want to wait, depending on the time of the year. Loan officers tend to be more willing to close on loans toward the end of the fiscal year because they want to have an impact on their end-of-year evaluations, which will affect their bonuses. The challenge lies in figuring out when the end of the lender's fiscal year is.
If you can't figure out when your lender's fiscal year ends, or you don't want to wait until that part of the year, you could wait until the right part of the month. Loan officers will want to close as many loans as possible at the end of the month in order to boost their monthly numbers. There's a good chance you'll be able to obtain better terms, including better interest rates, at the end of the month than you would at the beginning of the month.
Refinancing your mortgage can be quite beneficial to your current and future financial situation. However, to truly take advantage of the ability to refinance, you should make sure to ask yourself these eight questions.
There are many facets to consider before you can make an informed decision on whether or not this will be beneficial for you in the long run.
Refinancing | 18 April, 2018