Everyone can use that extra bit of cash flow that we believe will come from refinancing and reducing our monthly mortgage payment. But there are numerous factors you will need to consider before pulling the trigger on refinancing. What you might think is a good deal could actually have you paying more in the long run.
Here, we’ll review five things you need to consider when deciding whether refinancing is right for you.
What is the value of your home? Has the value of your home depreciated since you purchased it? If that is the case, then it could be extremely difficult to obtain the lower interest rate on your home. If the value of your home is worth less than the amount that you owe on your mortgage, then you are going to have some difficulty with a refinancing situation.
Even if the value of your home is the same as when you purchased it, according to the Federal Reserve, “If you have a loan that includes negative amortization (when your monthly payment is less than the interest you owe, the unpaid interest is added to the amount you owe), you may owe more on your mortgage than you originally borrowed. If this is the case, it could be difficult for you to refinance.”
How high is your credit score? Since you purchased your home, have you maintained good credit? If you haven’t, then it could be far more difficult to get the kind of interest rate you think you are entitled to. Lenders base your interest rate on how big of a credit risk you are. So be sure that your credit is in good, clean shape before spending the time and money to consider refinancing.
According to SF Gate, US News and World report indicates that a score of 740 will get you the best possible rate, but other sources cite 750. It’s not that you won’t be considered for a loan with a score in the arena of 580, which does qualify you for a refinance. It’s simply that you won’t get anything close to the best rates, and your cost savings could thus be negligible in a refinance.
Keep in mind that lenders also look at things like your employment history, what your current income is, and other factors like current debt that indicate what type of a financial risk you might be in terms of ability to pay your monthly mortgage.
If you are able to refinance, how much lower will the monthly payment be? Consider the fact that with refinancing, you are paying off one loan and creating a new one. Consider the length of the loan and the new amount that you will wind up paying over that period compared to how long you have left on your current loan and the amount you will wind up paying on that. If the new loan is less costly, then it is obviously well worth refinancing.
Some people are misled into thinking that because their monthly fee is lower, they are saving money. But you really need to consider the duration of the new loan and if it really will wind up saving you money after all. If you have PMI (Private Mortgage Insurance) because you couldn’t put down a deposit of 20% on your home, and you can get rid of the PMI, there is obviously some good very incentive to consider refinancing. But in some cases, the step winds up not being worthwhile
How much is the penalty fee for switching your mortgage company? Most mortgage companies have a penalty fee associated with leaving them, which could ultimately be in thousands of dollars. Make sure that you fully understand the financial consequences of switching mortgage companies before considering doing so.
It also costs money to engage a lawyer to make sure that the process runs smoothly and that you are not being bamboozled in any way. Appraisal fees, application fees, title insurance fees, and title search fees are all also costs to consider. Though you might save money on your monthly fees, the cost to refinance in and of itself may render the process not worthwhile to you.
Are you planning to move and sell your home soon? If you are planning to move before you will be able to pay off your refinancing costs, then it’s not worth the expense of refinancing. It can take anywhere from one to two years to pay off these fees.
In short, be certain that you have thoroughly considered all of the implications of refinancing before you pull the trigger on what might in the moment seem like a great deal. You may already be in the more optimal situation than if you were to refinance for a number of reasons. If your credit is not in great shape, then you might not get a better interest rate which would reduce monthly fees. If your loan term is not too much longer, then paying that off and getting a new one may be the wrong move even though monthly fees are lower. Try using a mortgage calculator to compare current costs versus what you might be able to save in refinancing. You may find that it is absolutely the right decision, but it’s well worth making an informed and studied decision on the subject.
Which factors have prevented you from refinancing? We’d love to hear about it.