Refi Mortgage: 12 Things to Consider
A refi mortgage can be used for several purposes — to lower your interest rate, to lock in a fixed interest rate, to pay off credit card debts, or to combine two mortgages into one. It is a substantial financial decision to make, so make sure you are well informed with information before taking any action on a refi mortgage.
The following information should help you be a more educated shopper when it comes to looking for a refi mortgage.
If you are thinking of paying off credit card debt with a refi mortgage, consider the following:
- Lower Interest Rate. A refi mortgage will almost certainly lower the interest you are paying. Average annual interest rates on 30 fixed mortgages currently stand at approximately 6.4%. If you have $20,000 in credit card debt, the difference between a 15% interest rate and a 6.4% interest rate will be more than $140 per month.
- Interest is Tax Deductible. Mortgage interest is usually tax deductible, while credit card interest is not. What this means is that a refi mortgage will not only lower the interest you are paying, but also lower your tax burden. Depending on your tax bracket, it could mean that a 6.4% mortgage interest rate is equivalent to a 4.1% after-tax credit card interest rate.
- One Simple Payment. One of the nice benefits of consolidation through a refi mortgage is that you pay off all of your different credit cards, allowing you to make only one fixed mortgage payment each month. This is much easier to manage than multiple credit cards and mortgage payments with different due dates and changing payment amounts.
- Putting Your Home at Risk. Credit cards are unsecured debts. This means that your property cannot be repossessed or foreclosed if you fail to make payments. This is also one of the reasons that interest rates on credit cards are so high. Be aware that if you get a refi mortgage to pay off your credit cards, you are taking unsecured debts and making them secured by your home. If an unexpected event happens that makes you unable to pay your credit card bills, your credit rating will suffer. But if that event means you can't make your mortgage payment, you could lose your home. Make sure to do a detailed budget to make sure that you have some financial breathing room so that even in the event of an unexpected hardship (medical, temporary job loss) you will be able to continue making your increased mortgage payment.
- PMI May Cost You. Be aware that if your refi mortgage increases your mortgage balance about 80 percent of the value of your home, your lender will require you to pay for Private Mortgage Insurance (PMI). This could increase your monthly payment by $100 to $200 per month and wipe out the benefit of your lower interest rate. To add insult to injury, PMI is not tax deductible.
- Mortgage Fees and Total Interest Paid May Be Higher. Be aware that if you have the ability to pay off your credit debts in a short time period, you will almost always be better off paying off your credit card debt versus getting a refi mortgage. First, there are significant fees that you will pay to the mortgage company that is refinancing your home — these could total 2% or more of the mortgage balance you are refinancing. In addition, if you could pay off your credit card debt in a short period of time, the total interest you will pay on that debt could be substantially less than the interest on a 6.4% mortgage that is paid out over 30 years. Paying $20,000 in credit card debt at 15% over 4 years will result in total interest to you of about $6,700. Paying $20,000 at 6.4% over 30 years in a mortgage will result in about $25,000 in interest.
If you are looking into a refi mortgage to lock in a low or fixed-rate mortgage, consider the following:
- Are Your ARM Rates Rising Above Market Rates? As interest rates increase, ARM loan payments do too. Homeowners concerned about payments, and whose rate is higher than current fixed mortgage interest rates, might consider a refi mortgage. Many economists forecast basically stable interest rates through Thanksgiving or so, but with the amount of uncertainty in financial markets, there’s no telling. You can begin the process with a mortgage lender and have him or her watch rates for you to establish a good time to lock your loan.
- If Refinancing Affordable? Refinancing involves expenses that can total around 2 percent of the total loan amount. Typically, financial advisors suggest a refi mortgage is worthwhile if the savings on payments will pay for the refinancing costs within 2 years. Homeowners can calculate their own break-even date by dividing the up-front cost (the figure on the Good Faith Estimate form) by the decrease in the monthly payments.
Review the lender's Good Faith Estimate form to see your anticipated monthly savings. The answer is the number of months it will take to pay off the refinance — and sooner is better.
- Have You Grown Roots? Homeowners who plan to stay in their home for a long period of time might find that a refi mortgage makes sense. If you have a long term left on your mortgage payments, and your rate is higher than market rates — or you have an ARM or balloon-payment loan and want the security of a fixed rate — you’ll likely meet the "break-even" criteria outlined above.
- Is Your Credit Less Than Stellar? Those who have made credit mistakes (such as late payments, especially on the mortgage) will benefit from spending a few months cleaning up their act before applying for a refi mortgage. Paying on time and reducing or eliminating credit card balances will earn a better refinanced mortgage rate.
- Is Your Life in Flux? Homeowners should not invest in a refi mortgage if they might sell the home within a year or two. Divorce, job relocation, or even a big raise might make you rethink your residence. Refinance when your life is stable.
- Consider (PMI) Payments. Most lenders require PMI for borrowers whose mortgage balance is greater than 80 percent of the price of their home. When the loan value falls below 80 percent of the home’s value, borrowers may be able to request elimination of PMI. Some loans may even require borrowers to refinance to eliminate PMI.
Removing PMI will give most borrowers an immediate monthly payment reduction of $100 to $200 (the mortgage statement lists the specific payment). You may decide to hold off on a refi mortgage if you anticipate falling below the 80 percent loan-to-value mark soon. In this case, waiting a few months to refinance could mean significant savings by eliminating your monthly PMI payments.