As you can imagine, this question is on the minds of a lot of people right now. Rates are still flirting with historic lows, so many folks are looking at their mortgage statement and comparing current rates and offers they see in ads. Whether you should refinance depends on many factors other than just the rate. Here are a few key points to consider, but remember, run the numbers!
Traditionally, it’s advisable to refinance if the rate is at least 1% less than your current mortgage interest rate. That said, if you happen to have a large mortgage, or are paying PMI (private mortgage insurance), refinancing for less than a 1% rate change may still make sense. Especially if your home has appreciated and you are still paying PMI. The combination of a lower interest rate, increased equity, and the removal of PMI through refinancing could save you a lot of money.
The key question to ask is probably more important than the rate you are considering. That is, how long do you intend to remain in the property you are going to refinance? Is it your primary residence and do you intend to stay for longer than a few years? This is important because if you are thinking of selling your primary residence within the next 24 months or so, it may not make sense to refinance due to fees, lack of time to save on interest, and the hassle of refinancing.
Next, you want to ask why you are refinancing? Are you facing a milestone event such as retirement, marriage, divorce, or coming to the end term of an ARM? Do you need money for a second home, investment property, or remodeling a primary residence? These, and many other reasons could be a good time to consider a refinance. If you are facing a milestone such as upcoming retirement, definitely consider a refinance to save money going into retirement. It will be easier to refinance prior to retirement while you still have employment and an income.
The elephant in the room that people focus on is the monthly payment. The main goal of refinancing is to save money over time on the interest you are paying on the loan. That is, reducing the cost of the borrowed money. However, for most the focus is entirely on the monthly payment and the perceived monthly savings on their payment. Be sure that the real savings is through a lower rate; don’t just focus on the payment. A lower payment though can definitely take pressure off of the monthly budget.
Check your balance sheet. Related to why you want to refinance, is your overall financial standing. Keep in mind that there could be a rare situation where switching from a 30-year mortgage to a 15-year mortgage could in the long run actually save you a lot of money. However, your monthly payment is likely to increase. Whether this is the case depends on how many years you have left on the 30-year mortgage, the rate, and if you plan to remain in the property. If you can handle the higher payment, this could be a good thing: both interest and time saved paying off the mortgage!
There are factors that will affect what rate you get from the lender. Factors such as your credit score (the higher the better), personal finances, your loan-to-value ratio, and your debt-to-income ratio, along with your home’s equity will all play a role in the rate you get. The better shape you are in financially, the better your loan terms should be. Keep in mind that not all loans and loan providers are equal. There are conforming loans, FHA loans, VA loans, jumbo loans, and surprisingly, USDA loans. They all have different requirements to qualify and various features. Also, will the new loan be a no-fee refinance or will you pay closing costs? Will you pay points (fees paid directly to the lender in exchange for a lower interest rate)? Are there other required fees such as an appraisal or document preparation? Be sure to review or ask about these fees.
I realize that having your email inbox and cell phone blow up can be annoying. When shopping for a mortgage, you want to get at least 3-to-5 quotes from lenders. Don’t go overboard and get too many, but at least get 3-to-5. Compare these, and pursue the strongest, best offer first.
If a few of the factors covered in this blog apply to you, such as facing a milestone, still paying PMI, or you haven’t refinanced in years and your rate is 1% or more over and above current offerings, then yes, you should consider a mortgage refinance. Remember, run the numbers! As an independent CERTIFIED FINANCIAL PLANNER™, I can help you. Contact me and let’s get started. #talktometuesday #getstarted #HowIcanHelpYou #GetHelp #Hireaplanner #CFPPro #savemoney #feeonly #refinance #mortgage