Today’s low interest rates may have you wondering whether you should refinance an existing mortgage. The answer may not be completely obvious. On the one hand, you may be able to save a bundle on your monthly mortgage payment, but on the other hand, will be refinancing be worth the upfront costs – and will you qualify?
Here are some issues you should consider when determining if you’re ready to refinance your mortgage:
A lower interest rate on your mortgage can be an attractive inducement to refinance. But two other factors should be weighed against that lower rate: If you refinance into a new loan that has a longer term than what’s left on your current loan, you’ll have to make those lower payments for a longer period of time and that could add up to more interest paid over the lifetime of your new loan. For example, if you took out a 30-year mortgage and made the payments for, say, 10 years and then you took out a new 30-year loan, you’d have extended the payments for another 10 years until the new loan is paid off. This consideration is one reason why some homeowners refinance with a new 15-year loan instead of a new 30-year loan.
That said, if you want to lower your monthly payment due to a change in your income or other financial setback, refinancing to extend the term of your loan can be a good way to achieve that goal.
Refinancing isn’t free. The costs of a new loan typically include loan origination fees, points, an appraisal fee, settlement services charges and a new lender’s title insurance policy. You may be able to finance these costs into your new loan or obtain a discount in exchange for a higher interest rate, but either way, you should consider the total outlay to refinance. If you plan to own your home for more than a few years, your monthly savings will help you recoup the costs. If you’re planning to move within a short period of time, the upfront costs may outweigh the benefit of the monthly savings you obtain by refinancing..
Home prices have declined in most areas and appraisers generally have become more conservative about home valuations. That means some homeowners may not have enough equity to refinance. On the plus side, the federal government’s Making Home Affordable program now allows qualified homeowners to refinance even if they owe more on their mortgage than their home is worth. The loan-to-value (LTV) ratio on a Home Affordable Refinance loan can be as high as 125 percent. More information about this program can be found at www.makinghomeaffordable.gov.
If you decide to refinance, it’s always a good idea to shop around for a loan product and an appropriate combination of interest rate, terms and costs to fit your needs. Also, be ready with your documentation. Most lenders today require a paycheck stub, bank statement, credit report and other information before they’ll approve your new loan.