The market has improved in pricing and rates are certainly looking good. Just because rates have gotten better and “everyone” seems to be refinancing, does it make sense for you to jump on the bandwagon too?
As with all financial decisions, it makes sense to understand your current mortgage situation. Here are some questions that will help a lender give you the best possible advice on the viability of a refinance and the possible benefits.
What is your current rate now? The general rule of thumb for a refinance to make sense is to drop your rate by 1 – 1.5%. If your loan amount is under $150,000, you may need the rate to drop 1.5 – 2% before refinancing will make financial sense.
Do you owe on any second loans, home equity loans or did you get any down payment assistance when you purchased your home? If you have these types of loans, and your goal is to pay them off, the new loan may be called a cash-out refinance. This type of refinance will require you to have more equity in the home and may have a little higher rate.
If you have a second loan, you may have to keep it depending on how much equity you have in your home. If the second loan was used for a down payment to buy your home, we may be able to use one of MN Housing’s refinance programs. Feel free to contact me if this situation applies to you. I would be happy to explain it in more detail.
What is your home value? Fortunately, the market is improving. Certain loan types will require you have a minimum amount of equity in your home or you may have to carry mortgage insurance.
Will the savings offset the closing costs? With all refinances, there will be costs involved, from the lender, title company and third parties. Also, a new escrow account will be established for future payments of taxes and insurance. Lenders can run these numbers to determine the charges and figure out the period of time to recoup the fees. The rule of thumb is to recoup the fees in less than 2 years. The costs may be covered by the lender (pay a higher rate), covered by you out of pocket, or rolled into your loan.
The last, and most important question – How long will you live in the home? If all the numbers align, but you only plan to live in the home another 2-3 years, refinancing may not make sense.
These are just a few of the questions to really determine if refinancing is right for you. Just because your friend, family member or co-worker is doing it, doesn’t make it the right financial decision for you. I’d be happy to assess where you are and where you want to be, to see if you should jump on the bandwagon too!
*Image compliments of Stuart Mills|freedigitalphotos.net