The 5 Questions To Ask Before You Refinance Your Mortgage
The interest rate on mortgages remains at or very near record low rates. While a number of people have already hit the refinance button, rates have ticked low enough that some may even consider a second refinance, or the rates are finally just too low to ignore for others. Regardless of your reason to refinance your home mortgage, there are some key questions that you should ask first.
1. What is the purpose or goal of a refinance?
Sure, a simple refinance can save you a good deal of money, but understanding that the right conditions for a refinance might mean more than simply low interest rates is important.
For example, you may have a 30-year mortgage right now with a decent interest rate. Lower interest rates might look like a great option to really cut your payment amount down. A simple refinance with a 30-year term will drastically reduce your principle and cut the overall amount paid in interest. However, slicing your mortgage down to a 15-year or 20-year term may drastically reduce the amount of interest paid over the life of the loan, saving you tens of thousands (or more). Either way, you should be able to save some money whether it’s to free up cash flow for monthly costs or to cut the overall cost of the loan in interest payments.
If you have seen an increase in income, you may be able to afford a small increase or settle for a shorter term with a payment near what you pay now.
2. Do I have enough equity to make a refinance worthwhile?
A big pitfall for a mortgage refinance can be the equity you possess in your home. To avoid private mortgage insurance (PMI), you will need at least 20% equity. While there are certainly options out there for those with less equity, this is a good benchmark to help reduce your payment. Sometimes, a refinance can even help remove PMI by reflecting increases in the value or your home. While each individual situation is a little bit different, the specific circumstances of your mortgage will be reflected in what is available to you. The more equity you have in your home, the less you will pay over the life of the loan.
3. What are my closing costs?
The reality is that there will be costs associated with a home refinance. Record low rates can look quite appetizing alone until the fees are added to the equation. Lenders love the environment because the low rates sell themselves for the most part. However, did you think you were going to shrink your balance owed without paying anyone anything? Think again!
Fees in the mortgage process are to be expected. You just need to make certain that the fees that you will pay will not undo the savings from the lower interest rate.
Fees are often rolled into the principle, but this makes the time it takes to break even take even longer. It can be worthwhile to pay the fees up front to help keep your principle balance lower and reduce the cost of interest on those fee amounts.
4. Is a home refinance worth the cost?
The answer to this question can be determined by some reasonably simple math. Closing costs run up to about 5% of the principle. This includes items like the appraisal, attorney fees, and origination fee.
It can take several months or more to break even, so you need to calculate the amount where you would break even (eg: pay for the fees, which is the up to 5% cost mentioned above) if you rolled those into the loan or decided to pay upfront. If your monthly savings are modest, then it may take you a long time to make up the costs.
If you feel uncomfortable figuring this out, or would like to know more about specific costs, then this is the part of a home refinance that a mortgage broker can really help you with.
5. What aspects of a home refinance could give me the most trouble?
Cashing out your mortgage is a popular was to pay for anything from a home remodel to pay off credit card bills. While it can be a great move to remodel an aging kitchen or upgrade a bathroom, other choices may carry higher costs than you realize. An example of this is cashing out your mortgage to pay off credit card debt.
On paper, a 4% or less interest rate looks much better than the 18% or higher rates on a credit card. However, if you are unable to pay your credit card bill, you won’t lose your house. If you cannot pay your mortgage payment, then the repercussions may be much more severe.
Last but not least, refinancing will often add more years to your loan. The term on a 30-year refinance could lead to what ends up having 5, 10, 0r even 15 years added on to the duration of the mortgage if you don’t want out.
Asking these five questions offers a starting point on the mortgage refinance journey. If you are able to answer these questions, then it’s time to sit down with a qualified mortgage broker and discuss the refinance process. Range Lending is ready to aid you in the mortgage refinance process and help you feel at ease with a home refinance!