Factors to consider before you decide if refinancing is for you.
As mortgage interest rates reach record lows, many homeowners are considering the benefits of refinancing. Whether in search of a lower monthly payment or a shorter loan period, the extremely low interest rates we are currently experiencing doesn’t necessarily mean that a homeowner should automatically refinance.
Monthly savings is only one factor to consider. Borrowers should also determine the cost of the refinance transaction, the current equity of the home and other pertinent details before making the decision, like the cost to apply for the loan.
Benefits of Refinancing
Homeowners refinance for a variety of reasons, but usually they do so to achieve a lower interest rate and lower payment. Additional benefits to refinance are as follows:
- To convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
- To withdraw home equity as cash
- To cancel monthly mortgage insurance
- To convert from a 30-year to a 20, 15 or 10-year loan.
Factors to consider before refinancing
If you can lower your interest rate and payment, it may be worth refinancing. Consider this: A homeowner with a large balance can reduce monthly costs by dropping their rate just 0.25%. However, someone with a very small loan balance may need to reduce their rate 2-3% before seeing enough savings to justify a refinance transaction.
Closing costs should also be taken into consideration when making the final decision to refinance. If you can save $100 per month in your payment, but it will cost you $5,000 to do so, the time to recoup the cost would be 50 months. That’s more than four years! Unless you plan on being in your home for at least that long, it may not make sense to refinance. However, if your closing costs are $3,000, but you are saving $200 per month, you would recoup the cost of the transaction in just 15 months. Decide how long you plan to be in your home and determine if the value equates to the cost of refinancing.
Additionally, refinancing can sometimes cost you absolutely nothing. If so, it is usually a good idea to do so, even if you’re only saving a fraction of what you currently pay each month.
With exception of a few loan programs, lenders will verify that you have at least a minimal amount of equity to allow a refinance. Generally, the more equity you have in your home, the easier it is to refinance. Therefore, your appraisal must come in higher than the amount of equity you have, and sometimes a low appraisal can be the reason a refinance falls through.
To learn more about refinancing and if it is the best option for you, contact De Young Mortgage at 559.420.7868.
Author: Brandon De Young, President of De Young Mortgage
This is not an offer for extension of credit or the commitment to lend. All loans must satisfy company underwriting guidelines. Information is subject to change at any time and without notice. Casey McDaniel, CA Bureau of Real Estate Real Estate Broker License # 01982326 NMLS Lic. # 1151413. Brandon De Young, CA Bureau of Real Estate Real Estate Broker License # 01922771 NMLS Lic. # 1029435. Jerry De Young, CA Bureau of Real Estate Real Estate Broker License # 00524649 NMLS Lic. # 293347. De Young Mortgage, Inc. NMLS #1026010. De Young Mortgage, Inc. CA Bureau of Real Estate Real Estate Broker License #01926671.