Is Refinancing Your Home Right for You?
With economic uncertainty and sliding interest rates, many people are looking at lending options to help them secure their future or reduce expenses, including refinancing their home. By doing this, some hope to lower monthly payments and interest rates, cash out some of their equity or change various terms of their mortgage, such as mortgage insurance premiums. Let’s explore how refinancing a mortgage works, and if refinancing is right for you.
HOW DOES REFINANCING A MORTGAGE WORK?
When you refinance a mortgage, it’s similar to the original purchase loan process, except you are applying for a loan to buy-out the existing loan – effectively replacing your current loan – rather than paying a seller.
HOW MUCH CAN YOU REFINANCE YOUR HOME FOR?
You may wonder how much you can refinance your home for if you meet the lending requirements. The amount will depend greatly on your home appraisal and equity, but essentially there are two ways to refinance your home, each for different amounts.
With a basic refinancing, you refinance just the amount left to pay on your original mortgage, plus any fees you may be financing. So, the amount you borrow is dictated by how much you have left to pay on your home.
With cash-out refinancing, you essentially borrow against the equity in your home (the difference between the value and what is owed), often referred to as “cashing out equity in a home.” With this kind of refinancing, you borrow the amount needed to pay off your existing mortgage, plus an additional amount you get back in cash, totaling the value of your home. Typically for this type of refinancing, you will need more than 20% equity in your home. Often homeowners use this refinance option to finance home improvements, as the value will go back into the home, but you can use the cash for anything you wish.
HOW TO DETERMINE IF YOU SHOULD REFINANCE YOUR HOME
So, now you know how refinancing works, but when does it make sense to refinance your home? There are a few factors to consider when looking at whether it is worth refinancing your mortgage. Let’s look at how each of these factors may impact your decision to refinance:
It’s important to remember that refinancing your mortgage, involves paying closing costs, just like you had to pay with the original mortgage. So, something to consider is whether you have the cash to pay for these. It is possible to finance closing costs, but this will typically result in higher rates and an increased loan amount.
Equity in Your Home
If you’re wondering how long you should wait to refinance your mortgage, a good place to start is by looking at how much equity you have in your home. Most lenders require at least 5% equity in your home before they will approve a loan to refinance your mortgage, but to get the best rates, you should have at least 20% equity in your home before refinancing.
Plans for the Future
In addition to looking at how much equity you have in your home, you should also consider how much longer you plan on owning your current home. There are fees and costs involved in refinancing your home, costs that will take time to offset by the savings. If you do not plan on owning your home long enough to offset the cost of refinancing, you may want to hold off. You should not refinance your home if you plan to sell it soon, as this will not be cost-effective.
One reason you may want to refinance is if your credit score has improved significantly since you originally financed your home. Better credit scores often result in better interest rates. The opposite is also true; if your credit score has dropped since you originally financed your home, you may want to consider working on getting your score back up before refinancing as you likely receive a worse interest rate.
The interest rate on a loan is one of the primary ways you either save or lose on a mortgage. If you notice rates going down by half a point or more, below the rate you are financed at currently, you may want to look into refinancing. The opposite is also true; if you see rates are going to rise and currently have a variable interest rate on your current mortgage, it might be a good time to refinance at a fixed rate to lock it in before rates go up further.
If you have some equity in your home, you may have may be able to refinance your mortgage for a shorter term (i.e., a 15-year mortgage versus and 30-year mortgage) and pay less interest over the life of your loan. If your goal is to lower monthly payments, you also can refinance for a longer-term loan to get the monthly payments down, but this will also result in paying more interest over the life of the loan.
If you have 20% equity or more in your home, you are often able to refinance without adding Private Mortgage Insurance or carrying a Federal Housing Administration mortgage insurance premium (FHA MIP) along with your monthly mortgage payment.
Ability To Recoup The Cost Of Refinancing
Ultimately, the overarching factor to all of these is that you should be able to recoup the cost of financing by what you will save by doing so. The ability to recoup that cost in a short amount of time is a good indication that it is worth looking into refinancing. If not, you may want to look closer at each of the factors above and work to build those up first.
After looking at each of these factors, prioritize which advantages are most important to you and then compare loan estimates to see which will help you reach your goal. At Waldo State Bank, we work with each individual to find the best solution for them to reach their goal. If you still have questions about refinancing and want to talk to someone about how to achieve your goals, contact us or email our loan department directly.