Should You Refinance Your Mortgage?
by Shawn Carvin, Senior Mortgage Banker
If you are considering mortgage refinance options, you’re not alone. But it’s sometimes hard to know whether or not you should refinance and, if so, exactly when to do it. Here are seven points you may want to consider before deciding.
1. Your home equity
Refinancing is a tool that can be used to help build equity more quickly. For example, choosing a 15-year loan by refinancing your current 30-year loan will likely build equity at twice the rate. Not only will you be able to save money in interest, you will pay your loan off in half the time. On the other hand, if you’ve already built an adequate amount of equity and want to take advantage of it, you can refinance and take cash out for investing, paying off credit card debt, making home improvements, paying for college tuition, or covering unexpected expenses that may arise. Many homeowners choose to refinance more than they currently owe in order to maximize the amount of cash out.
2. How long you plan to own your home
You’ll want to make sure you will be able to recover the costs associated with refinancing. In order to do so, simply divide the total expenses by the amount you will be saving on your monthly mortgage payment to find the break-even point. If you’re planning to remain in your current home for quite a bit longer than the amount of time if would take to cover the refinance cost, refinancing may be a good option. But if you likely won’t have time to break even on the costs, you may want to reconsider.
Private mortgage insurance is required in most cases where the loan balance exceeds 80 percent of the home’s value. As long as you’ve accumulated sufficient equity, refinancing is one way to quickly eliminate this unnecessary expense, as well as restructuring your loan with more favorable terms.
4. The type of mortgage you have
One of the reasons some home owners refinance is to switch to a different type of loan. If you start out with an adjustable rate mortgage (ARM) loan to take advantage of a lower interest rate, you may find it very desirable to refinance into a fixed-rate loan before the rate on your ARM is adjusted upwards.
5. Your current mortgage terms
This goes hand-in-hand with the type of home loan you have. And depending on your end goal, i.e., building greater equity, lowering your mortgage payment, or shortening the length of your loan, there are different refinancing options available. If paying more per month to shorten the time it takes to repay your loan is more important than a smaller payment over a longer period of time, refinancing may be for you.
6. Interest rates
A lower interest rate is one of the primary reasons home owners want to refinance. As a general guideline, refinancing is worthwhile if it will lower your current interest rate by at least 2 points (2%). Below that threshold, it is important to carefully evaluate refinance costs, the monthly savings, and the length of time you plan to own in your home. An interest rate reduction of 1% – 1.5% may require three to five years or longer just to break even on the refinancing costs if you are not eliminating PMI in the process.
7. Your credit score
Of course, your current mortgage terms are based on your credit profile at the time of your application. Most borrowers who make on-time payments find their credit improves during the first few years of their home loan. If your credit score has significantly increased, you may find that it’s a good time to refinance and take advantage of a better interest rate, and possibly eliminate PMI. It’s a move that can result in a substantial savings, making the choice of refinancing a wise decision.