October 17th, 2014 8:37 AM by Jackie A. Graves, President
Refinancing your existing home mortgage
can save you a lot of money if done correctly. This worksheet from our loan
experts will help you figure out if now is the right time to refinance your
1. Why do You
Want to Refinance?
lower my interest rate -
Generally, you should consider refinancing if you can lower your interest rate
by at least 2%. Since interest rates are low right now, it is possible that you
could save a lot by refinancing your
switch to a type of loan that is better for me – If you currently have an
adjustable rate mortgage (ARM), you may want to switch to a fixed rate mortgage
(FRM) in order to lock in a low rate for a long time. Alternately, you may be
able to reduce your current payments by switching from a FRM to ARM.
avoid a balloon payment –
Some mortgages have a large payment due at the end of the loan term (usually
5-7 years). You may need to refinance your loan in order to avoid having to pay
this “balloon payment.”
not have to pay private mortgage insurance anymore – Private mortgage insurance
(PMI) is sometimes required by lenders if you had to borrow more than 80% of
the home’s sale price. If the home’s value has increased, you can use this
amount to refinance and stop paying PMI.
cash out home equity –
Home equity is often used to finance a remodeling project, college tuition, car
purchase, or a vacation. If your home’s value has increased, you can refinance
to cash out this extra amount.
consolidate my debts –
If you have a lot of high interest debts, you may be able to save by
consolidating these debts into a mortgage. Auto loans, credit cards, second
mortgages, and other debts can be included in your refinance.
2. Where do
Your Finances Stand Now?
credit and finances have improved –
If your credit score has
improved since your last mortgage application, you may be able to reduce the
interest rates on your loan by refinancing. You can also save by refinancing if
other financial indicators such as your debt, income, and savings have
credit and finances are the same –
If your credit score and financial situation have not changed since your first
mortgage, you may or may not be able to save with a refinance. Look at recent
interest rate changes and consider your reasons for refinancing before you
credit and finances are worse –
If your credit score has decreased, you may not be able to save money by
refinancing. Even if interest rates have dropped, your credit score may not
qualify you for a low rate. Estimate what mortgage rates you
could receive and consider your reasons for refinancing before you apply.
3. How much
will it cost you to refinance?
While a lower interest rate will mean
lower monthly payments and less total interest, a refinance will also mean
paying closing costs and, in some cases, points. If the monthly savings exceeds
these closing costs, refinancing is a good option.
reasons why you should not refinance?
plan on moving soon –
Refinance costs usually take a year or so to pay off before you start saving on
your mortgage. If you know that you will be moving before the amount of time it
will take you to break even, you should think twice about switching loans.
loan has a prepayment penalty –
Some unscrupulous lenders add prepayment penalties to a borrower’s mortgage.
These penalties charge you expensive fees if you sell or refinance your home
before a certain amount of time (usually 1-5 years). Calculate if your
refinancing savings could outweigh these fees.
am close to paying off my current mortgage – If you are close to paying off your mortgage, it may
make sense to wait instead of refinance. Refinancing can extend the term of
your loan and increase your costs.
am having financial problems –
If you are having major financial problems, you may want to reconsider
refinancing as a way to consolidate your debts or borrow money. In some
situations, your home could be put at risk if your financial problems continue.
Completing this worksheet should help
you decide if it makes sense to refinance your mortgage.
Find Out Where
You can check your credit score each month using
Credit.com’s free Credit Report Card. This completely free tool will break down
your credit score into sections and give you a grade for each. You’ll see, for
example, how your payment history, debt and other factors affect your score,
and you’ll get recommendations for steps you may want to consider to address
problems. In addition, you’ll also find credit offers from lenders who may be
willing to offer you credit. Checking your own credit reports and scores does
not affect your credit score in any way.
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