Refinancing your mortgage, even if rates are low is not always the best choice. These are the things you should consider before refinancing.
There are a variety of factors that go into deciding when you should refinance your home loan. Refinancing a mortgage can be done for many reasons, but some people are better financial decisions than others.
Take, for example:
- Refinance savings can be used to increase retirement contributions and/or strengthen your budget. Smart.
- Do you want to cash out equity and go on a spending spree with your money? It’s not so easy.
- Do you want to improve the value of your house by renovating your bathrooms and kitchen? It all depends.
Refinancing is popular when mortgage interest rates drop. When is it a good idea to refinance? Is it a good idea?
How much can you save on refinancing?
Refinance is a great option for two reasons:
- Reduce your monthly mortgage payment by;
- You can save money on the interest you pay on your house over the long-term.
A refinance will typically do both in the best of cases, but it doesn’t always work.
If you have 25 years left on your 30-year mortgage, and you refinance for a 30-year term at lower rates, you will get a lower monthly amount, but you may end up paying more in interest over the long-term because you’ll be paying off your entire home in 35 years.
However, if you refinance your mortgage with a 15 year mortgage and have 25 years remaining on your loan, your monthly payments may go up but your long-term interest rate will be lower (and your house will be paid off 10 years earlier).
A Beverly Hills mortgage broker or loan officer can help you create scenarios to show you the potential savings and costs of refinancing. Refinance costs money. This can add up to several thousand dollars.
There will be application and origination fees. You may also have to pay a fee for your home to be appraised. In some cases, you might need to pay mortgage points which can lower your interest rate.
How long do you plan to keep your house?
Refinance is only sensible if you intend to stay in your home for many more years. Don’t refinance if you think that the property will be sold soon. Refinances can take anywhere from several months to several years to reach a point where you are able save money and break even. The mortgage broker or loan officer can help you decide when it’s possible to break even.
Do you and your home qualify for refinance?
You will still need to qualify, even if refinance seems sensible in your case. You can refinance your loan even if you own a home and make timely payments. Refinanceability depends on many factors, including:
Refinance applications require a completely new underwriting process. The bank must see that your home is more valuable than the loan amount, that you have sufficient income to pay the monthly repayments, and that you have good credit.
It may prove difficult to refinance traditional mortgages if your mortgage is underwater.
My view: When should I refinance
Although each situation is unique, I recommend refinancing your mortgage in the following situations:
- Current interest rates are less than 1% below your current rate
- You intend to stay in your home for at least 5 more years.
- Refinance loans are approved you anticipate
It is not an easy decision to decide when to refinance. Don’t just jump on the bandwagon because others are doing it. It’s worth taking the time to calculate your total costs, your monthly payments, and decide if it’s right for you.