Refinancing Your Home?
With interest rates at rock bottom, record lows, many homeowners are considering refinancing their mortgages to save cash. But there’s a right way – and a wrong way – to go about refinancing your home for maximum savings.
Most homeowners refinance to lower their monthly payment, avoid balloon payments on Adjustable-Rate Mortgages (ARMs), to get rid of Private Mortgage Insurance (PMI) or to cash out a portion of their home’s equity.
A home is often your largest asset – and a mortgage is one of the most expensive financial transactions that you could ever make. Essentially, refinancing replaces your mortgage with a lower interest rate and you start over with a new loan.
Before you refinance, here are six things you should know:
1. Don’t cave in to pressure. The ads beckon you: Hurry! Refinance NOW, before rates creep back up! With mortgage rates at historic lows for the last few years, who could blame you? But wait. Interest rates might go up next week — and they might not. Don’t let pressure from lenders and brokers force you to make a poor, hastily made decision that could cost you thousands of dollars. You need time to fully consider your refi options (15-year fixed, 30-year fixed, ARM or interest only, etc.).
2. Weigh the costs of refinancing. While refinancing your home will most likely save you money, it’s not free. Consider: While refinancing fees vary by lender and state, they generally average between 3 to 6 percent of your outstanding principal, according to A Consumer’s Guide to Mortgage Refinancings by the Federal Reserve. By the time you add application, loan origination costs, points and other fees, refinancing a $200,000 home can quickly spiral into the thousands. Before you sign on the dotted line, do the math and make sure it makes good financial sense. Calculate your refinance break even point, where you factor in the costs of the loan vs. the potential savings.
3. Factor in how long you plan to stay in your home. If you plan to stay put at least seven years and can get a better interest rate, it generally makes sense to refinance. You’ll recoup your refinancing costs over time. Anything less than that and refinancing will cost more money in the long run – even with a super low interest rate.
4. Shop around. Shopping, comparing and negotiating could save you thousands over the life of your refinance. Plus, the refinancing business is super competitive, so take advantage of it. To begin, get at least 3-4 quotes from different lenders and brokers. Let them know you are shopping around for the best deals, and don’t be afraid to make them beat or match competing offers. Also, don’t forget to talk to your current lender, who may be able to lower your fees because you’re an existing customer. Compare everything (interest rates, closing costs AND other fees) in writing.
5. Consider your financial situation. When layoffs, job losses and under employment are common, personal finances often take a hit. Consider your income carefully before you refinance. Would $100 a month lower mortgage payment make make the difference between keeping and losing your home? Or does it make sense to get an interest-only loan or do you have the extra cash to pay 15-year mortgage as opposed to a 30-year loan and save tens of thousands of dollars in interest? Only your bank account knows.
6. Take your home’s equity into account. Refinancing your home isn’t as simple as getting a new interest rate; it essentially erases your mortgage and you start all over again. Not bad if you are in the early stages when you’re mainly paying interest (the annual percentage rate or APR on your loan). Not so much if you’re home is nearly paid off or you’ve begun to knock down the principal (amount of money borrowed or amount still owed on a loan). No matter what your situation or reason for refinancing, you will always be better off if you consider all of your options carefully and speak with your trusted mortgage company first.