Is refinancing a good idea?
How do I Know When it is Right to Refinance?
Does it make sense to refinance any time that you can lower your monthly mortgage payment? After all, who wouldn't enjoy a break on their monthly mortgage payment?
Refinancing your home loan is a complex decision. Just because you can lower your payment, does not mean you should refi.
You have be sure that the timing is right to refinance, before you pull the trigger? What you must do is evaluate certain critical factors and consider how best to balance them in order to make the best decision regarding a possible refinance.
Here are some factors you need to consider:
- Do you know your goals? Have you reviewed the reasons for refinancing? Are you trying to lower your monthly costs, save the most money over the term of the loan, take cash-out to consolidate debt or pay for a child's college? Clearly knowing your goals gives you a much better chance of making a good decision.
- Your interest rate. How does your current interest rate compare to the rate you can get on the refinance loan?
- Are you a good borrower in the eyes of lenders? Have you prepared yourself to get the best rate available? The only way to get the low rates you see advertised is to meet lenders' requirements for credit and debt-to-income ratio.
- What is your home worth? You should know the value of your home in today's market . House prices have fallen in many markets, do don't rely on what your home was worth the last time you checked. Don't waste your time trying to refinance if your home is worth far less than what you owe.
- Will you have to pay mortgage insurance? Private Mortgage Insurance (PMI) is required on most refinance mortgages where your loan is 80% or more of your home's value. If the value of your home has fallen, you need to watch out for the lender requiring, you have to be careful about requiring PMI if you are not currently paying it. The additional PMI costs can wipe out the benefit of refinancing.
- Find the right lender. In order to find the right loan, you need to work with the right lender. Make sure to shop around, to find the right deal. Use one of Bills.com's pre-screened mortgage partners, so you end up with the best refinance loan available.
There is a good reason that there is so much focus on mortgage interest rates (and not just that rates are and have been very low for a long time). The size of your monthly mortgage payment is directly related to your interest rate. If your first mortgage has a fixed rate, you can easily compare it to current mortgage rates and know with relative certainty whether refinancing now will save you money. In the absence of any other pressures, as long as the rate you have on a fixed rate loan is lower than current rates, you should probably stick with it.
Refinance an ARM
On the other hand, if you currently have an adjustable rate mortgage (ARM), you need to weigh other factors. Did you sign a three- or five-year adjustable rate mortgage (ARM) in the last few years? If so, be sure you know when your introductory rate expires. Many ARMs were set to have a very low monthly payment in the first few years of the loan, with a new payment taking place thereafter.
If you have an ARM, make sure you know whether you are required to pay a pre-payment penalty if you refinance. The cost of a pre-pay penalty can wipe out any savings you would gain in refinancing.
If you had an interest only loan, you can expect your payment to rise, perhaps significantly, once the interest only period ends and you have to start paying principal as well as interest. Unless your income has increased significantly, these payments could be an ugly shock. Do not wait for this unpleasant surprise! If the introductory period on your three-year, five-year, or other loan is set to expire, beat increased payments to the punch before the first one hits your mailbox.
Sometimes, lowering your mortgage payment is not the primary focus. Are you thinking of paying down some of your high-interest debt? Do you have a child going off to college soon? Dreaming about a newly remodeled kitchen or bathroom? Getting cash out of your home may be the best way to pay for these kinds of expenses. You can get cash out through a refinance which will allow you to draw against the equity in your home without taking out a second mortgage.
Current interest rates, as we just reviewed, are only part of the equation, when it comes to knowing when to refinance. Use the tools and resources available at Bills.com, such as our refinance calculator, to learn about and review your options. Establish your goals and learn about your options, so you make the right decision.