How to Decide if You Should Refinance Your Mortgage?

With the recent drop in mortgage interest rates, you may be wondering if now is a good time to refinance your mortgage. Yes, it could be a good time to refinance your current mortgage, especially if the new interest rate is one-half percent or lower than the rate you are currently paying. However, before you rush to refinance, there are a few things you should consider before doing so.

ARE YOUR CREDIT SCORE AND DEBT-TO-INCOME RATIO IN GOOD SHAPE?

Refinancing makes sense only if you qualify for a lower rate. That usually means you need to have a good credit score. A lower credit score may mean a higher interest rate despite the current lower rates. The amount of debt that you are currently carrying could also have an impact on whether you are eligible to refinance at this time.

DO YOU PLAN TO STAY IN YOUR HOME FOR AT LEAST THREE OR MORE YEARS?

Just like you pay closing costs when you first obtain a mortgage, you will also have these costs when you refinance your mortgage. Closing costs can run an average between two to five percent of your loan amount. You need to consider what your break-even point is to recoup your closing costs through the savings you will realize each month. For example, consider if your closing costs are estimated to be $3,500. If your monthly payment is expected to drop by $115 a month, it would take 31 months to reach your break-even point and your real savings begin.

HAVE YOU BUILT UP EQUITY IN YOUR HOME?

Before refinancing your home, you need to consider how much equity you have in your home. You will want to have at least 20 percent equity between what you owe and your home’s market value. Otherwise, you will be required to also pay private mortgage insurance (PMI) that will add to your monthly mortgage payment.

WHAT GOALS DO YOU HOPE TO ACHIEVE BY REFINANCING YOUR HOME?

Consider the reasons why you want to refinance your home.

• Do you want to switch to a 15-year mortgage from a 30-year to pay off your home sooner?
• Do you want to get out of an adjustable-rate mortgage?
• Do you want to reduce your monthly mortgage payments?
• Do you want to make major renovations to your home?
• Do you want to pay off a second mortgage by combining both mortgages?
• Do you want to pay off credit card bills and other high-interest debt?
• Your reason helps determine what type of mortgage you should pursue.

ARE YOU AWARE OF THE DIFFERENT OPTIONS FOR REFINANCING?

There are different options available to refinance a mortgage and the option you choose should be based on what goals you want to achieve by doing so.

• Fixed-rate loans – A fixed-rate mortgage keeps your interest rate the same throughout the life of your loan; therefore, the only changes to your monthly mortgage payment will be for property taxes and homeowners insurance if they are included in your monthly mortgage payment.
• Adjustable-rate mortgages (ARMs) – An adjustable-rate mortgage typically starts out with lower interest rates during the first few years of the loan. The interest rate will either increase or decrease once the variable-rate begins. For example, if you obtain a 10/1 ARM, you will pay a fixed interest rate for 10 years. After that 10 years ends, your rate will fluctuate according to market changes.
• Cash-out refinance – If you want to take advantage of the equity you have built up in your home, a cash-out refinance could allow you to refinance your mortgage for more than you owe. With the money you receive, you can use it to pay off higher-interest debt or make repairs or renovations to your home.

Are you ready to refinance your mortgage or have questions about which option best fits your needs? Contact our mortgage experts for assistance.