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.
People get a refinance for different reasons. The top reasons are lower interest rates, debt consolidation, use home equity, and to get rid the insurance fee. Don’t rush headlong into a refinance because interest rates have gone down. If you are going to stay in your home for 20 or 30 years, getting a refinance may be costly in spite of lower interest rates.
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.
Check out every detail of the new loan which includes closing costs that is rolled into the principal balance, interest rate, years left to pay the mortgage, monthly equity building, monthly increased equity, and break even estimate. If the difference can hardly be felt, there’s no reason to get a refinance. The trick is to compare principal and monthly payments of the previous and new loans based on the number of years you are going to pay off the loan.
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.
If you qualify under the new government programs, you may not have to pay some or all of the fees. If you are refinancing because of the loss of a job due to the recession or due to serious illness, the fees may be waived in your case. The decision to waive the fee is made on a case by case basis, so before refinancing you should investigate whether you qualify for this waiver. This fee waiver will make refinancing more affordable for those who qualify.
Until you have reviewed your financial situation and the requirements for a refinance, you can assess your chances for paying off a refinance successfully. But if you are dealing with an Adjustable Rate Mortgage and want to switch to a lower Fixed Rate Mortgage, lock into the lowest rate now after considering everything that goes into a refinance. If you’ll break even soon enough and pay lower rates which you can comfortably afford, then by all means, check this option.