7 questions to ask when refinancing your mortgage
If you hang around in certain circles long enough, eventually you’ll hear someone talking about their “refi.” Not to be confused with Wi-Fi or a Hi-Fi, it’s a refinancing of your mortgage. And as interest rates track lower, the chances that you could benefit from a “refi” get higher. Just make sure it makes good financial sense for you, and you’re not just following the crowd. Here are seven questions to ask about refinancing your mortgage:
1. How long do you plan to stay in your house?
This is one question you have to ask yourself. Most experts say that, in general, it’s not worth it to refinance if you know you’re going to spend less than three more years in your current home.
2. What is the interest rate?
Seems simple enough: if it’s less than the interest rate on your current mortgage, that’s good. But there’s more to it than that. Make sure you understand if it’s a fixed rate or an adjustable rate, and how much the rate could rise if it is adjustable. And read on…
3. What is the term?
A rock-bottom interest rate probably isn’t going to save you any money if you’re doubling the length of time you’re paying off your mortgage loan. Make sure you understand what the term of your new loan would be, and how much you’ll be paying in interest over the life of the loan. .
4. What are the fees?
Fees are crucial to understanding the benefit of refinancing, because they can wipe out any savings you may get from a lower interest rate. Lenders can tack on myriad extra costs, such as application, credit check, attorney, appraisal and inspection fees. Find out what your costs would be, and then run some numbers to figure out how long you’d have to stay in the home to break even. We make it easy for you with the LendingTree refinance calculator.
5. Will you have to pay points?
If you’re getting a lower interest rate, but you had to pay a large lump sum in exchange, it could make refinancing less beneficial or even (ahem) pointless. Again, factor any points into your refinancing equation.
6. Will you have to pay PMI?
If you are getting cash out from your refi, or if your house has decreased in value, it’s possible that your loan-to-value ratio will be higher than 80 percent. A mortgage lender would probably then require you to buy private mortgage insurance, which would increase your monthly payment and possibly make refinancing less attractive.
7. Is there a prepayment penalty?
You’ll want to ask this question when you’re looking at both your current and prospective mortgage. If your current mortgage carries a prepayment penalty, then refinancing may not be for you. If the mortgage you’re considering does, then that would make it less profitable to refinance in the future.
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