There are many questions you need to ask yourself before deciding to refinance your home.
You need to calculate how long you’ve owned it and how much longer do you expect to own it. You also need to know if you qualify and if it’s worth the cost of going through the financial process again.
The cost to have a financial institution or lender refinance your mortgage may outweigh the initial savings paid towards interest.
When to Refinance
If you’re looking to lower your monthly mortgage, or to tap the equity you have in your current home and cash it out, then it’s probably a good idea to refinance
The question of when to refinance used to rest on whether the current rate was at least two percent lower than when you first bought the house, but now the real question is how long it will take you recoup the refinance cost.
For example if you pay $2,500 up front and are saving $250 per month, you need to keep the new loan for at least 10 months, no less.
On the other side, it’s probably not a good idea to refinance if you plan to move sooner. If you have a prepayment penalty that can hurt you if decide to go ahead and your rates fall in the meantime; you absorb the cost.
Understanding the Math
To better understand your refinancing options, it’s good to get the math. If you have a 15 year loan on a house you bought three years ago for $120,000 at five percent, your monthly payment would be around $950 per month.
You would more than likely have less than $100,000 left to pay. If the bank offers to refinance you at three percent, you would save more than $100 per month but the refinance would be for 15 years, not 12.
Your loan could cost an extra $3,000 or more, depending on the cost to refinance and you would be starting all over again.
Before You Refinance
If you decide that a refinance is the way to go but you’re upside down on your mortgage, you need to come up with the difference between what you own and what you’re about to refinance with the bank.
If you’re self-employed or hold a second mortgage, that could be tricky. Banks may not want to work with your situation so you’re better off using a mortgage broker, who can negotiate on your behalf.
The rule is that you need a great credit score and equity in your home to get the process started. Either way you’ll want to make sure you get a copy of your credit report and check it.
You will also need to document your employment, income and assets as you won’t get anywhere if lenders can’t verify your information. Once you’ve passed those hurdles, you can choose to stick with your original lender or find a new one.
The advantages of sticking with your current lender is that it may be less expensive, you won’t need a new appraisal, title search or any other items as that information already resides in their system.