Refinancing. You’re certainly familiar with the term. The draw of lower interest rates and monthly payments sounds enticing, but is it worth the hassle?
The answer is maybe. It’s all about the numbers, and making them work for you. Refinancing can be a great contribution to a long-term financial strategy. Let’s look at a few factors to consider when making this decision.
What is refinancing?
Refinancing basically means getting a new mortgage on your house. The money borrowed with the new loan pays off the old loan. There may be several reasons people consider refinancing. The top reason tends to be lowering your monthly payments or lowering your interest rate. This sounds great, but There are factors to consider.
How long will you stay?
Refinancing, as with any mortgage, carries some costs. Origination fees, closing costs and percentage points mean money out of pocket. When you refinance, you can expect to pay a few thousand dollars to cover such things like credit checks, appraisals, and title search fees, to name a few. To find out if this is worth the cost, you will want to calculate your breakeven point. Total up the amount of fees you will pay. Next divide this by how much money you will save monthly with the new loan. This gives you the number of months before you begin to start saving on the refinance.
- For example, if your closing costs are $3,000, and your new monthly payments will be $200 lower, it will take you 15 months to save enough to cover the costs and start really benefitting (3000/200=15).
It is important to note that there are some banks that specialize in refinancing such as Valley. We offer lower closing costs, which may help you reduce your breakeven point in terms of the number of months you plan on remaining in your home.
If you plan to move soon, this may not be worth the cost. On the other hand, if you expect to be in this house for many more years, a longer breakeven point may be worth your while.
What are your current terms?
There are many types of mortgages and you should be aware of the terms of each. Knowing the advantages of each type of loan will help you in your decision process with regard to refinancing.
- Adjustable Rate Mortgage – An ARM comes with an initial fixed interest rate – typically lower than the market fixed rate – followed by set periods where the rate can change based on the market. If you have an ARM and are nearing the adjustment window, it could be a good strategic move to refinance.
- Home Equity Line of Credit – With a HELOC, you may have an initial term of interest-only payments, and then the payments are recalculated to include interest and principal. If you are nearing the end of your interest only term, consider consolidating your HELOC into the primary mortgage. This will help you eliminate uncertainty in your future payment schedule.
- Private Mortgage Insurance – PMI is to protect the bank from default on loans with low down payments. If you have PMI on your loan, you may qualify to have it removed once your equity reaches 20% of your home’s value. Refinancing to remove PMI could save you a few hundred dollars each month.
- 30-Year Fixed – If you currently have a 30-year fixed mortgage, you may consider refinancing to a 15-year fixed. This is one case where your payments will go up, but it could be worth it in the long-run. You will end up paying significantly less overall, and your home equity will increase that much faster. Just be careful to make sure you really can afford the extra expense. You don’t want to bite off more than you can chew.
- Older Loans – If you have substantial equity built up in your home, you may be able to receive a lump sum payment (cash out refinance) while maintaining a similar monthly payment on your new mortgage. Based on the interest rate disparity between your new and existing loan, this may or may not lengthen the overall term of your loan.