Refinancing your existing home mortgage can save you a lot of money if done correctly. This worksheet from our loan experts will help you figure out if now is the right time to refinance your mortgage.
1. Why do you want to refinance?
To lower my interest rate - Generally, you should consider refinancing if you can lower your interest rate by at least 2%. Since interest rates are low right now, it is possible that you could save a lot by refinancing your mortgage.
To switch to a type of loan that is better for me - If you currently have an adjustable rate mortgage (ARM), you may want to switch to a fixed rate mortgage (FRM) in order to lock in a low rate for a long time. Alternately, you may be able to reduce your current payments by switching from a FRM to ARM.
To avoid a balloon payment - Some mortgages have a large payment due at the end of the loan term (usually 5-7 years). You may need to refinance your loan in order to avoid having to pay this "balloon payment."
To not have to pay private mortgage insurance anymore - Private mortgage insurance (PMI) is sometimes required by lenders if you had to borrow more than 80% of the home's sale price. If the home's value has increased, you can use this amount to refinance and stop paying PMI.
To cash out home equity - Home equity is often used to finance a remodeling project, college tuition, car purchase, or a vacation. If your home's value has increased, you can refinance to cash out this extra amount.
To consolidate my debts - If you have a lot of high interest debts, you may be able to save by consolidating these debts into a mortgage. Auto loans, credit cards, second mortgages, and other debts can be included in your refinance.
2. Where do your finances stand now?
My credit and finances have improved - If your credit score has improved since your last mortgage application, you may be able to reduce the interest rates on your loan by refinancing. You can also save by refinancing if other financial indicators such as your debt, income, and savings have improved.
My credit and finances are the same - If your credit score and financial situation have not changed since your first mortgage, you may or may not be able to save with a refinance. Look at recent interest rate changes and consider your reasons for refinancing before you apply.
My credit and finances are worse - If your credit score has decreased, you may not be able to save money by refinancing. Even if interest rates have dropped, your credit score may not qualify you for a low rate. Estimate what mortgage rates you could receive and consider your reasons for refinancing before you apply.
3. How much will it cost you to refinance?
While a lower interest rate will mean lower monthly payments and less total interest, a refinance will also mean paying closing costs and, in some cases, points. If the monthly savings exceeds these closing costs, refinancing is a good option.
4. Other reasons why you should not refinance?
I plan on moving soon - Refinance costs usually take a year or so to pay off before you start saving on your mortgage. If you know that you will be moving before the amount of time it will take you to break even, you should think twice about switching loans.
My loan has a prepayment penalty - Some unscrupulous lenders add prepayment penalties to a borrower's mortgage. These penalties charge you expensive fees if you sell or refinance your home before a certain amount of time (usually 1-5 years). Calculate if your refinancing savings could outweigh these fees.
I am close to paying off my current mortgage - If you are close to paying off your mortgage, it may make sense to wait instead of refinance. Refinancing can extend the term of your loan and increase your costs.
I am having financial problems - If you are having major financial problems, you may want to reconsider refinancing as a way to consolidate your debts or borrow money. In some situations, your home could be put at risk if your financial problems continue.
Completing this worksheet should help you decide if it makes sense to refinance your mortgage.
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