August 10th, 2019 9:39 AM by Jackie A. Graves, President
It’s a question
homeowners ask when interest rates tumble: Should I refinance my home mortgage
or stick with the loan I have?
While a home
refinance may ultimately be a smart financial move, a number of questions must
be considered first that will help evaluate your specific situation.
Here are some
of the top questions to keep in mind:
I lock in a fixed interest rate or lower my interest rate?
Locking in a
fixed or lower interest rate or lower payment are good reasons to refinance.
with a variable rate mortgage, for example, might want to refinance to a fixed
rate loan to avoid higher payments if rates rise. With fixed rate loans, the
monthly payment stays the same for the life of the mortgage. Snagging a lower
interest rate that results in savings on your monthly mortgage cost might also
make refinancing a good option.
lenders will offer a selection of refinance loan types and can lock in a rate
once the borrower is ready to apply,” said John Cabell, director of wealth and
lending intelligence for J.D. Power. “The exact monthly payment may be hard to
pin down until all transaction fees are finalized, and sometimes those details
are not finalized until closing.”
I lower my total interest expense?
total interest over the term of a new loan compared with the remaining term on
an existing loan can be another good reason to refinance. However, in some
cases switching to a mortgage with a lower rate but a longer term could result
in you paying more interest over the life of the loan despite having a smaller
Bankrate’s refinance calculator can help you
do the math.
I have enough equity?
If your home
is worth more than you owe on your existing mortgage, you’re in a much better
position to refinance than if you have no equity.
A home with a
lot of equity built up will have a lower loan-to-value ratio (LTV), which banks
prefer as it makes the loan less risky. An LTV of 80 percent or less also
eliminates the need for private mortgage insurance. It also makes it
easier to refinance for a larger amount than your existing mortgage, known as a
cash-out refinance. Funds raised in a cash-out can be used to pay down debt,
fund home improvements or help with college costs.
nearby home sales and speaking with a local realtor, you may be able to get a
general idea on the value of the home,” said Sherry Graziano, senior vice
president and mortgage transformation officer at SunTrust. “You can then
compare that to what you still owe on your mortgage to see what equity you have
built. If it’s too little, it may not be worth refinancing and may not meet the
my credit score high enough?
If you have a
good history of making your mortgage payments and paying your other bills on
time, you’re in a much better position to refinance than if you’ve made some
late payments or missed any payments that hurt your credit rating.
score will affect your eligibility for loans and low interest rates,” said
Cabell. “Knowing your score before applying for a refinance and building a good
score over time are important for ensuring you have the most financial
should be able to tell you up front whether you’re qualified for specific
refinance offers based on your credit score.
much will I pay in closing costs?
It may not
make sense to pay points and closing costs to refinance even if you could lower
your interest rate, payment or total interest expense.
the amount of closing costs you’re willing to pay should not exceed the
financial benefits of the lower refinance interest rate,” said Cabell. “That
fact requires validating before you commit to the transaction, though, so
consumers should make sure the lender provides assurance in writing.”
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 after the refinance. It would take you 24 months to breakeven and start
enjoying the cost savings of the lower interest rate on the new mortgage.
worth noting that some lenders offer a no-cost option that lets you get the benefits of refinancing at a higher
interest rate without paying any costs. This typically comes with a higher
interest rate, however.
long do I plan to own my home?
factor to consider before embarking on a home refinance is how long you expect
to own the property. If you’re planning to move within a few years, refinancing
may not make sense, even if you could get a lower interest rate.
There might not be enough time to offset your closing costs, despite a lower
borrower is considering selling the property within the next few months or
couple of years, it may not be advisable to refinance since the borrower may
not recoup the upfront fees and interest over such a short timeframe,” said
On the other
hand, you may be able to lower the upfront costs if you’re willing to accept a
slightly higher interest rate. But that could mean that it wouldn’t make sense
for you to refinance.
costs are involved in a refinance?
can cost hundreds or thousands of dollars, depending on the loan amount, the
type of loan, the region of the country where the property is located and other
include an appraisal fee, credit report, title insurance and closing or
“The cost to
refinance will depend on the lender and associated third parties, so it pays to
understand those cost obligations before committing,” said Cabell.
Reasons to refinance a home
rates are at historical lows, doesn’t mean refinancing is the right decision
should have a clear financial objective and see refinancing as one of a
multitude of options to achieve that objective,” said Graziano, who outlined
the following key reasons one might want to refinance.
To alter the terms of the
loan by shortening or lengthening the life of the loan
To take advantage of a lower
interest rate, resulting in lower monthly payments and paying less total
interest over the term of a new loan.
To replace an
adjustable-rate mortgage with a fixed-rate mortgage
To consolidate debt or to
finance educational expenses or home improvement projects
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Source: To view the
original article click here