July 31st, 2019 8:33 AM by Jackie A. Graves, President
refinancing your home mortgage might sound like a good idea in theory,
especially with interest rates falling, it may not always be possible for every
homeowner or even desirable for that matter.
doesn’t always make sense financially. That’s particularly true for borrowers
who plan to sell their home in the next few years, which makes it harder to
have enough time to recoup refinance closing costs and fees.
the leap, therefore, homeowners should ask themselves the following key
questions to help determine if a refinance makes financial sense.
I have enough equity in my home?
The amount of
equity you have in your home is the difference between what your home is worth
and what you still owe on the mortgage.
need to have at least 20 percent equity in their home to qualify for a new loan
without paying private mortgage insurance (PMI). Adding
PMI to the cost of a new loan could negate the benefit of a refinance.
whether you have equity is always a key question to ask,” says Matt Hackett,
senior mortgage and finance expert for Equity Now, a direct mortgage lender.
“Home values have been rising for years and many homeowners have more equity
than they may think.”
refinance is yet another option to consider for those who may not have enough
home equity. This involves the consumer bringing money to closing and paying
down their mortgage so that there’s a lower balance owed, Hackett says.
I have good enough credit?
borrower credit scores play a big role in securing a mortgage and a good rate,
there’s a multitude of options for borrowers along the full credit spectrum,
higher scores will qualify for lower rates, but there are Federal Housing Administration programs for
borrowers with scores as low as 500.
are my financial goals?
exactly why you want to refinance is a crucial part of the process, says Mounia
Rdaouni, assistant vice president of mortgage specialized operations for Navy
Federal Credit Union.
will refinance for different reasons,” Rdaouni says. “Examples include taking
equity out of the house to pay for home improvements; securing a lower rate,
term or payment and consolidating debt into one payment.”
homeowners, of course, refinance to lower their monthly payments and boost cash
flow. If this is your inspiration, a mortgage
calculator can provide an estimate of what the new monthly
payment will be after refinancing.
homeowners, however, pursue refinancing to obtain a shorter-term loan (often
with with higher monthly payments) so that they can reduce overall interest
costs and own their homes outright faster. Swapping a 30-year mortgage for a
15-year loan, for example, is a way to accomplish that goal.
homeowner, you should discuss the reasons why you’re refinancing with your
lender so they can help you find the product that would best meet your needs,”
You may also
want to consider whether you hope to retire without a mortgage before signing
on for a new 30-year loan.
“Some are not
aware, but they could be refinancing into a brand new 30-year, which means they
are starting over on their terms and not where they left off,” says Michele
Hammond, a private home lending adviser with Chase.
additional consideration: Those who have employment concerns may want to
refinance into a loan with the lowest possible monthly payment in case a job
long do I plan to stay in this home?
generally costs about 2 percent to 3 percent of the loan amount. So, before
spending that money, think about how long you plan to stay in the home and then
determine whether you’ll reach the break-even point before moving. Your
break-even is the point when the savings you are realizing outweighs the costs
A rule of
thumb is to calculate how many months it will take to recoup your closing
costs. Let’s say your closing costs are $3,000 and your monthly savings are
$125 per month after the refinance. It would take you 24 months to break even
and start enjoying the cost savings of the lower interest rate on the new
of time a homeowner plans to keep the mortgage is a key input in the cost
benefit analysis,” Hackett says. “All else being equal, the shorter the time in
the house, the less likely it makes sense to refinance.”
if you’re close to paying off your mortgage it might not make sense to spend
the money on a refinance. That money might be better off going toward paying
off the principal on your current mortgage.
“It might be
tempting in a low-rate environment to want to take advantage of the lowest rate
available. However, homeowners need to be aware of the closing costs and time
it will take them to break even,” says Rdaouni of Navy Federal Credit Union.
are the terms of my current mortgage?
with adjustable-rate mortgages or interest-only loans might want to consider
the potential benefit of switching to a fixed-rate loan as part of a refinance.
With a fixed-rate loan, you have the peace of mind of knowing that your monthly
principal and interest payment won’t change over the life of the mortgage.
loans today rarely have a prepayment penalty, some homeowners still have loans
with that restriction, which could reduce the financial gain of a refinance.
suggests downloading a current mortgage statement to identify the various terms
of your current loan.
Do I have a second mortgage or line of credit?
have a second mortgage will face additional complexity when refinancing.
change the calculus of the refinance benefit calculation,” Hackett says. “Do
you want to pay off and close the second mortgage or do you want to leave it
open and resubordinate it to the new first mortgage? Both scenarios are
possible in a lot of situations, but it is important to discuss this with your
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