Did you know that most homeowners refinance their mortgage at least once? Since refinancing does come with a cost, you need to determine what your goals are if you choose to do so. Remember, a refinance is a new restructured mortgage that is often at a lower interest rate and with a different loan term.
Should you refinance?
Here are several questions to ask yourself, all of which will help you determine if refinancing makes sense for you:
Is the new mortgage rate lower?
If your interest rate is higher than what is being offered, it may benefit you to refinance. A lower mortgage rate will give you a lower monthly mortgage payment. However, the life of the loan will return to its original term. This is called a rate/term refinance and is used for immediate savings.
Is a shorter term loan possible?
Choosing a shorter term loan is a long-term strategy for saving. Shorter term mortgages have lower mortgage rates, but they are amortized for fewer years, and can make the monthly mortgage payment higher than what you are already paying. If you can comfortably do this, then the total interest paid over the life of the loan will be significantly lower because the mortgage will end sooner.
Do you have other high-rate debts to consolidate?
If you have other debts that have high interest rates, it may make sense to consolidate that debt with a refinance. Consolidating debt does not eliminate it. Instead, the debt is paid and the total balance is added to the mortgage amount. It is then paid monthly through the mortgage payment at the lower rate. As long as there is enough equity in the home, you can borrow funds, over and above the mortgage balance, to pay off these debts. Many homeowners take this type of refinance to eliminate credit card debt, home equity loans, auto loans, student loans, etc.
Are your current loan terms risky?
Many first time homebuyers choose adjustable rate mortgages (ARM) because of the temporary lower monthly payment. However, an ARM is considered risky because the mortgage rate is not fixed and will change in the future. It is a common practice to refinance before the ARM is scheduled for a rate adjustment.
Are you staying in this home?
The number of years that you plan to live in your home is significant if you are thinking about refinancing. There are expenses associated with refinancing, which must be paid at closing, or added to the mortgage balance. The break-even period occurs when the cost to refinance has been paid by the monthly savings, after which it becomes pure savings to you. If you plan on moving before the break-even period, it probably does not make sense to refinance.
Even though you may have other reasons for refinancing, the common goal is to save money. Whether it is a reduced rate, reduced monthly payment, reduced term, consolidation of debt, or a switch to a stable loan program, refinancing must make sense for you and your personal situation.
Editor’s Note: A ditech Home Loan Specialist can help you determine if it makes sense for you to refinance. Contact one today.