Should I Refinance My Mortgage?
Whether you bought your home just a couple years ago or more than a decade has passed, there may be a time when you ask yourself, “Should I refinance my mortgage ?” There are a number of reasons you might consider refinancing, a variety of factors that should influence your decision to do so, and several different types of loans for which you might qualify. To help you decide if refinancing is right for you, we’ve put together a primer on the topic. Today, we’ll talk about what refinancing is and go over a few of the reasons you might consider refinancing. Next time, we’ll discuss the factors that will impact your decision and your ability to refinance as well as the types of refinance loans that are available.
Note: Should I Refinance My Mortgage is designed specifically for homeowners. If you’d like information on refinancing your commercial loan, check out this post.
How Does Refinancing Work?
When you refinance your mortgage, you take out a new loan, using the money to pay off the existing one. The new loan is likely different than the old loan: it may be for a different amount or have a different interest rate attached. It might also be a different type of loan. For example, you might choose to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM). The one thing that will stay the same is the property associated that’s with the loan.
The Good News
If you bought your current home fairly recently, you might shudder at the thought of going through the process of getting a new loan again so soon. Chances are, you spent a lot of time working on that first loan: tracking down documents, making calls, arranging various appointments, addressing inaccuracies on your credit reports, and making sure your loan officer or mortgage representative had everything he or she needed to push that loan through.
The good news is that refinancing is often easier than obtaining an original loan. The process is also often not as fraught with emotion as it was the first time since you’re likely already living in the home you were so excited to finally purchase and move into that first time around. So, take a deep breath and relax!
The Not-So-Good News
Despite that refinancing is different than obtaining a mortgage in some ways, there are several aspects that are similar.
First, refinancing costs money. Yep, it’s true. Even though it can certainly be a vehicle for saving money (more on that below), refinancing still requires that you pay a number of fees at closing. Just as you did the first time around, you’ll again need to pay lender fees, title insurance, attorney’s fees. You might also be required to pay taxes, transfer fees, and an appraisal fee.
Also, there’s really no such thing as a no-cost refinance. Lenders who advertise these will let you know, when pressed, that while you won’t be required to pay upfront costs, you will still pay those costs, one way or another. Rather than pay upfront, you could instead have to opt for the above fees to be rolled into your new loan. You’ll pay interest on any amount that’s rolled into your loan, so the move might save you money now, but it will probably cost you in the long run. Alternatively, your lender might offer you a no-cost refinance if you are willing to accept a higher interest rate. For example, you might be required to pay $6,000 in closing costs on a loan with an interest rate of 3.75%. However, if you choose to get a loan with a rate of 4.75%, you might only pay $3,000. If you take a loan with 6% interest, you might not pay any closing costs at all upfront. One way or another, whether it’s in the form of interest, part of your loan, or at the signing table, you will pay those closing costs.
Traditional thinking suggests if you can reduce your current interest rate by 0.75% to 1% or higher, then it might make sense to consider a refinancing move. The first step is to calculate your monthly savings should you do the refinance.
Reasons to Refinance
While there are many reasons to refinance your mortgage, people are often motivated to do so with one or more of these goals in mind:
- Saving money: Yes, refinancing can save you money (though not always). If rates have gone down, your property value has gone up, you’re switching from an FHA loan to a conventional one, or from an ARM to an FRM, all of these have the potential to save you thousands of dollars or more.
- Peace of mind: If you have an ARM, you may be interested in refinancing to get into an FRM to enjoy the peace of mind afforded by knowing that your mortgage payment will be the same, month after month, with no surprises.
- Debt consolidation: If you have high-interest credit-card debt, you may be able to save money by taking out a loan for more than your home is worth, and using the excess to pay off other, higher-interest loans.
- Access to cash: A cash-out refinance will give you access to cash by taking out a loan for more than your home is worth, and using the excess to pay for college, make home improvements, or more. Because a mortgage is generally one of the lowest interest-rate loans available, it often makes financial sense to tap into a loan through these means.
Factors Affect Your Refinancing Ability, Options to Explore, Decision-Making, and More
Now that you know what refinancing is and that, in many cases, refinancing can save you money, it’s important to realize that the amount you could save from refinancing is highly variable and figuring out just how much you might save is a complicated task. Also, whether you can refinance at all depends on a number of factors. Once you’ve gathered the info, you’ll ultimately need to answer the question, “Should I Refinance My Mortgage?” for yourself. We’ll explore all this and more in our next post in the series.
In the meantime, if you’re considering a refinance, give us a call here at Villa Nova Financing Group. We’ll discuss your situation in detail, identify potential solutions, help you understand all your options, and ultimately assist you in reaching your financial goals with the help of a strategic mortgage refinance.