4 Things To Consider Before Refinancing Your Home
When is a good time to refinance your home? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
It might sound crazy given the high-rate environment we’re in to even be discussing refinancing right now, but the truth is, even with rates averaging near 6%, there are still hundreds of thousands of homeowners that could benefit from refinancing, according to Black Knight. For those that fall in this category, refinancing could be a great opportunity to shore up some extra cash as the cost of living remains a burden for many Americans today.
Now, it’s still right to assume that a majority of homeowners wouldn’t be able to lower their mortgage rate by refinancing today, but while lowering one’s rate is typically the prime reason people choose to refinance their mortgage, there may be other reason one would do so – e.g. to switch their loan type (from a fixed to adjustable and vice versa), change the term on their loan (perhaps they want to pay their mortgage off quicker so they refinance into a 15-yr loan from a 30-yr) or to get rid of Private Mortgage Insurance (PMI), although the latter typically works best for those who have seen their home value appreciate.
Regardless, there are things to keep in mind before you decide to refinance:
- What is it going to cost you? Refinancing a mortgage comes with a price tag, so make sure you double / triple check what costs to expect. Typical fees you may rack up include a mortgage application fee, an origination fee, an appraisal fee and points you might decide to pay for to bring the interest rate down. Things can add up quickly and affect your payback period. All other things being equal, look at the APR of the loan, rather than solely the APY, since that will show you the true “all in” percentage including additional fees. And, check to see if your current mortgage has a prepayment penalty. If it does, see if your lender is willing to waive the fee, especially if you refinance with the same lender.
- Do you have an existing home equity product? If you’ve decided to tap into your home’s equity and have an open home equity loan or HELOC, you’ll need to get permission from your lender to refinance. Some lenders might require you to pay your home equity account off before refinancing.
- Do you plan to move soon? It’s highly unlikely there is any benefit of refinancing if you don’t plan to be in your home for much longer. If you sell before you break even on your refinancing costs, is there really any benefit?
- Consider the term of your new loan. It’s easy to see a lower rate and automatically think refinancing is the best option, but it’s important to keep in mind that with that lower payment comes another 15-30 years to pay off that loan, usually increasing the interest you’ll pay over the life of the loan. Make sure to calculate your break-even point and how the overall costs — including total interest — of your current mortgage and your new mortgage would compare. Use a mortgage refinance calculator, like the free one Credit Karma offers, to see how much you can save.
Has your credit significantly improved since you closed on your original loan? Even if interest rates aren’t low, your credit score is another potential way to save on interest. If your credit has improved since you last closed on your loan, you might qualify for a better rate.