Be Careful Refinancing
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.
Reasons for refinancing include consolidating high interest loans like credit cards, liquidating the equity, or lowering monthly payments with a more favorable interest rate. While refinancing for debt consolidation may, in fact, save you a considerable amount of money, refinancing for a lower monthly payment can actually cost you money, particularly if you intend to remain in your home for more than 15 years. There are more costs to consider than monthly interest rates when refinancing.
Lower interest rates might be tempting but if you are in the 15th year of a 30 year mortgage, you will end up the loser. All the money saved from the existing loan will go up in smoke. But if your mortgage is just eight years old and the interest rate is 2% or 1% more than the new rate, go ahead, get a refinance.
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.
Fees also add up the cost of the refinance. There’s the origination fee lenders require and be as high as $4000 for a $200,000 loan amount. This is to cover the cost of getting the loan processed. Another fee to pay is the closing fee that is generally 2% or 3% of the new loan.
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.
The people most likely to benefit from refinancing are those with adjustable rate mortgages and those with balloon payments. People who have a fixed interest loan will see far less benefit unless their interest rate is very high. Shop around for the lowest possible interest rate before deciding where to get your loan. If you have a poor credit rating or FICO score, you will not be likely to find a low fixed rate mortgage. If you are not sure if refinancing is your best option, speak with an accountant or real estate specialist.
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