If you are considering refinancing your home mortgage, there are many factors you should consider before making your decision, especially if you are refinancing to save money on your current loan. Your savings will be dependent on the number of years left on your current loan and the amount that you intend to refinance on your home.
The reasons most people chose to refinance are to obtain more favorable interest rates, to use the equity they have in their home, to consolidate high interest loans like credit cards, or to simply to lower the amount of their monthly mortgage payments. If your reason for seeking refinancing is lower interest rates, you may not save money with your new loan. This is especially true if you intend to remain in your house over the long term.
If you currently are 15 years into a 30 year mortgage, you will probably not realize much in savings on a refinance, in fact you may actually lose money. If you are only 8 to 10 years into your 30 year mortgage, and your new interest rate is 1% to 2% lower than your current mortgage, you could in fact see some significant savings.
Don’t just sign on the dotted line and trust your lender’s integrity. Review every aspect of the terms of the loan including origination fees and closing costs. How much of your monthly payment will go to equity and how much to interest? At what point will you actually break even on the loan? Compare all the terms to the terms of your current mortgage and see if, over the life of the loan, you will actually realize any savings. You may want to seek advice from a real estate attorney or account if you don’t understand the terms and costs of your current loan or the cost of refinancing.
Your debt to income ratio needs to be a consideration, especially if you are removing equity from your home. It is unwise to end up with an upside down loan, in other words, a loan on which you owe more than the value of your home. You will also need to know your FICO score. A high FICO score will enable you to receive lower interest rates. If your FICO score is low, you will probably not be able to get favorable interest rates.
A point that many people fail to consider when refinancing is that the fees and closing costs are part of the cost of the loan. The origination fee for the lender and the closing costs for the new loan can add thousands of dollars in costs to the new loan. This may offset any savings you realize with a lower interest rate.
Thankfully, under the Obama administration, this has been scrapped BUT only for those who qualify e.g. Losing their jobs because rescission, hospitalization, or other problems that warrants the scrapping of the fee. If you can prove this, you can get government assistance to get a refinance. If you qualify, you can enjoy an affordable refinance but not until then.
People with an adjustable rate mortgage who want to refinance with a fixed rate mortgage, and who qualify for the fee waiver, stand to save thousands of dollars over the life of their loan. Make sure you find the lowest available rate you are able to qualify for before proceeding with the refinancing of your home. If the refinancing means lower monthly payments and the costs don’t exceed the savings, refinancing is an option you should consider. Your best move may be to talk with an attorney who is familiar with real estate before refinancing.