Should you refinance your home? Since we can only speak in regards to refinancing on a general basis, before you make a decision to refinance your home you should be sure to speak with a mortgage professional. Everyone’s circumstances are different, and what applies to one person might not apply to you.
Before making a decision to refinance you home, or any other property you own, you must first be fully familiar with the three fundamental aspects of acquiring a new loan to replace your existing loan with your home as security, which is what refinancing is, by definition.
The three major factors that determine the feasibility of refinancing a mortgage are:
The Interest Rate
You should not refinance your home to save money if the interest rate offered is greater than that you are currently paying with your existing mortgage. If you simply want some cash to pay for home improvements, then shop around for the best interest rates you can get, because there is a fine line between refinancing and a secured loan.
Another aspect of interest rates to consider is that if you have your mortgage for a long time, the bulk of your current payments will be used in reducing the capital. Initially, you are paying a lot more in interest than in capital, but as your capital sum reduces, so does the interest. If you refinance, you will likely be back to paying more on interest than repaying the actual loan.
Against that, of course, is the fact that your equity would reduce the sum borrowed, unless you want to include the ability for home improvements such as a new kitchen or a room addition.
The Term of the Loan
The term, or length of the loan period, will impact upon both your payments and how able you are to maintain them. You can refinance over whatever period your lender is willing to offer you up to 30 years, depending on your age, ability to pay and the equity on our home.
You will be informed of the fees in advance, but the cost of fees involved may play a role in the decision making process and whether or not your new rate is low enough to justify refinancing.
Divide the fees by your monthly saving to find your break even point, and find out how long it will take before you are actually begin saving money. Let’s say you refinance your home and save $88/month over your existing payments. If the fees, including the closing costs of your existing mortgage, totaled $3,000 it would take 34 months before you are actually saving money. If the closing costs were $6,000 (which is not unreasonable), you would have to repay for 68 months before you would be saving money over your existing payments.
Refinancing: The Big Picture
Take the fees, including the closing costs of your existing mortgage, interest rate and repayment period into consideration, and figure out how much you will be repaying in terms of the finance provided. Perhaps an extended term would enable you to afford a sum you could not repay over a shorter period. Before you refinance your home, be sure to view your Good Faith Estimate to insure your fees are in line.
There are a variety of factors (as mentioned above) that come into play when deciding if refinancing your existing home loan makes the most sense for you. Still have questions? We can help. For a FREE consultation, please call us at the number at the top of the page. We can help you understand if refinancing makes sense for you and help educate you on which programs makes the most sense for your needs if refinancing fits your current situation.