Refinancing your mortgage is the process of revising and replacing the terms of an existing loan or mortgage. By doing so, you could potentially reduce your interest rate and save on your monthly payment. Additionally, given the right circumstances, you can access equity in your home, giving you cash to spend on almost anything.
All that being said – today’s rates should not be the only factor used when determining whether to refinance. There are a few key items to review before applying for a home refinance.
1.The Costs of Refinancing
Long term goals are the most important thing to think about when refinancing your home. There are upfront costs associated with every refinance and determining how long it will take for the lower payment to offset those costs is key to making a smart financial decision.
Determining the costs upfront is the first step in establishing your breakeven point. Although the costs associated with a refinance can vary, they are typically spread across a few categories: lender fees, title fees, prepaid interest, and, depending on what state you are living in, state taxes.
Understanding how much money you will save monthly is the second step. This means asking your loan officer for a proposed monthly payment. Subtract the proposed payment from your current monthly payment and you have the difference.
3.Know Your Break-Even Point
Now the tricky part – take the total closing costs from the new loan and divide it by the savings. That will give you the number of months it will take for you to breakeven. If you plan on keeping your home for more months than the breakeven point, refinancing would be a good idea.
4.Explore The Terms
Right now, there are two main mortgage options to explore when refinancing your home – a 30-year fixed and a 15 fixed. A 30-year fixed loan will offer lower monthly payments, whereas a 15-year loan will typically offer a lower interest rate with higher monthly payments. The reason the monthly payments are higher on the 15-year product is because the loan is being paid off in half of the time – this means the money you pay to the bank is lower, and the equity you build is higher.
Given the current market conditions ARM products, such as 3-1 and 5-1 ARMs are currently trading higher and refinancing or purchasing with one of these products would not be a good idea. ARM stands for adjustable-rate mortgage, this means an ARM product would not only start with a higher interest rate but runs the risk of increasing over time.
If you are thinking about refinancing your mortgage, the first step is to configure your goals. When you are ready to get started, just give us a call and we will go over your options.