Is Refinancing a Smart Move for You?

Thinking about refinancing your mortgage? Consider these ideas to determine if now is the right time for you.

When you refinance your mortgage, you can replace your current mortgage loan with a new one that has more favorable terms.

Why Refinance Your Mortgage?

Refinancing your mortgage can change your financial picture for the better and you don’t necessarily have to wait for interest rates to change to benefit. Here are some reasons why refinancing might be a good option for you right now:

• Lower Interest Rate- When interest rates drop, there is always a chance of saving money on a refi. Depending on the remaining principal balance of your current mortgage, just half a point drop in interest rates could provide significant savings for you. Calculate the number of months it would take you to reach the break-even point – the time when your savings equal the costs of the refinance.

• Your Credit Score Improves- If you bought your home when your credit score was lower, you probably qualified for a mortgage loan at a higher interest rate. If your credit score has improved, you could qualify for a lower interest rate, which could save you on interest paid over the life of your mortgage loan.

• Shorter Loan Term- Most mortgages start out with a 30-year term to offer you the lowest monthly payment possible. If your principal balance is significantly paid down by now, refinancing at a lower interest rate could allow you to shorten your mortgage term to 15 years or less.

• Convert Adjustable Rate to Fixed- Sometimes, an adjustable-rate mortgage is the best option when purchasing a home. But if interest rates are low, you can convert that adjustable-rate mortgage (with its fluctuating payments) to a fixed-rate mortgage. You’ll have a fixed, predictable payment that makes budgeting easier.

• Cash-Out Equity- Home equity is a good source of funds for repair or renovation projects, to consolidate debt, or to maximize retirement contributions. Refinancing your mortgage for a higher amount that pays off your existing mortgage and provides the difference in cash could let you take advantage of the equity you’ve built up.

Before you decide to refinance, determine your goal. Do you need to lower your monthly payments to make your budget balance? Are you looking for some cash to invest in home improvements? Do you want to pay your home off before you retire? There are several ways to benefit from refinancing your mortgage.

What Is Required to Refinance?

Once you have a goal in mind, consider whether you qualify for refinancing your mortgage. Before contacting your financial institution, consider these factors:

• Timing- Depending on your current mortgage, you may need to own your home for six months before you refinance. The longer you own the property, the more equity you’ve potentially built. If there was a sudden upward adjustment in the real estate market after you purchased, you may have enough equity immediately to justify a refi.

• Home Equity- The equity you have in your home is the current market value minus the amount you owe on your mortgage. When you first buy your home, you may have very little equity. Over time, your equity grows as you pay down your loan. In many real estate markets, the value of your home also increases over time, adding to your equity. For refinancing, you want to have at least 20% equity in your home.

• Credit Score- Your credit score will affect your qualification for refinancing and the interest rate you can get on your new mortgage. It’s a good idea to look at your credit report and see if anything has changed since you bought your property. The higher your credit score, of course, the better mortgage terms you will qualify for.

• Debt-to-Income Ratio- A comparison of your debt and income will determine your qualification for a loan. Although your home secures your mortgage, lenders still want to see that you have the ability to make the payments comfortably. This means they are looking for your overall debt load to be no more than half of your total income. You can check this yourself by adding up all your monthly expenses, including minimum credit card payments, and subtracting the sum from your total monthly income.
• Available Capital- Closing costs are almost always associated with a mortgage. These expenses can vary, and you may be able to roll them into your new mortgage instead of paying them upfront. You should be prepared to pay 2% to 5% of the loan amount in fees.

In general, refinancing your mortgage is cheaper and easier than purchasing your home in the first place. You are now a veteran of the mortgage application process, and you may be able to reuse some of the documentation you produced for your current mortgage.

Building for the Future

Timing is an important element in any financial decision. You need to consider your current financial needs and how refinancing your mortgage will affect you years from now. For example:

• Refinancing your mortgage could put you on track to pay off your home before you retire, making it easier to live on a fixed retirement income when you are older.
• Investing your home equity in building an addition to your home could increase your property value, making it easier for you to sell your house when you want to relocate.
• Refinancing at a low interest rate now could protect you from future spikes in rates that end up costing other homeowners thousands of dollars.
• Cashing out the equity in your home could provide funds that will help you pay down debt, pay for home renovations, or invest for retirement.

Think about where you might be in five years and how refinancing your mortgage could set you up for the financial future you want to have.

 Get Started on Your Mortgage Refinance

Get your numbers together, understand your goals, and contact one of our Mortgage Experts. They can explain your refinancing options and answer any questions you have.