Tuesday May 23, 2017

Should I Refinance

Lowering your interest rate

The interest rates on mortgages are tied directly to how much you pay on your mortgage each month, lower interest rates usually mean lower payments.

Lower interest rates may be available to you now because of any or all of the following conditions - interest rate market is lower, better credit scores, job situation, more equity in your house and/or better finances.

Adjusting the length of your mortgage

Increase the term of your mortgage: You may want a mortgage with a longer term to reduce the amount that you pay each month.  This will however increase the length of time you'll be making mortgage payments and the total amount that you end up paying toward interest.

Decrease the term of your mortgage: Shorter-term mortgages generally have lower interest rates.  Plus, by paying off the loan sooner, you'll be further reducing your total interest costs.

The trade-off is that your monthly payments are usually higher because you're paying more of the principal each month.

Refinancing is not the only way to decrease the term of your mortgage.  By paying a little extra on principal each month, you'll pay off the loan years sooner.

For example, adding $50 each month to your principal payment on a 30-year loan reduces the term by 3 years and saves you more than $27,000 in interest costs.

Changing from an adjustable rate mortgage to a fixed rate mortgage

When you have an adjustable rate mortgage (ARM), your monthly payments will change as the interest rate changes.  With this kind of mortgage, your payments can increase or decrease.

You may find yourself uncomfortable with the prospect that your mortgage payments could go up.

In this case, you may want to consider switching to a fixed rate mortgage and give yourself some peace of mind by having a steady interest rate.  You might also prefer a fixed rate mortgage (FRM) if you think interest rates will be increasing in the future.

If the monthly payment on a fixed rate loan includes taxes and insurance, your payment each month will change over time due to changes in property taxes, insurance.

Should you cash out your equity

Home equity is the difference between the balance you owe on your mortgage and the value of your property.  When you refinance for an amount greater than you owe, you can receive the difference in a cash payment otherwise known as a cash-out refinance.

Remember though, when you take out equity, you own less of your home.  It will take years to build your equity back up.

Many financial advisers caution against cash-out refinancing to pay down unsecured debt (such as credit cards) or short-term secured debt (such as car loans). You may want to talk with a trusted financial adviser before you choose cash-out refinancing as a debt-consolidation plan.

Your current mortgage has a prepayment penalty

A prepayment penalty is a fee lenders might charge if you pay off your mortgage loan early, including refinancing or selling your house.

You'll usually have a choice between a hard or soft if you choose a prepayment penalty on your mortgage loan.  A hard means you can't sell or refinance your home without paying the penalty and soft means you can sell your home without penalty, but if you choose to refinance you'll likely pay a hefty penalty.

If you are refinancing with the same lender, ask them whether the prepayment penalty can be waived, unlikely to happen but never hurts to ask.  You should always consider the costs of any prepayment penalty against the savings you expect to gain from refinancing as it rarely makes sense to pay the penalty.

It is usually, but not always, better to wait until the prepayment penalty falls off (ends after a pre-described time period).

Are you eligible to refinance?

Determining whether you're eligible for refinancing is similar to the loan process you went through to purchase your home.  Your lender will consider your credit score, debts, job status, income and assets, the current value of the property and the amount you want to borrow.

Lenders will look at the amount your requesting and the value of your home, determined from an appraisal.  If the loan-to-value (LTV) ratio does not fall within the lenders guidelines, they may not be willing to make a loan.

If home prices have fallen in your area, your home may not be worth as much as you owe on the mortgage.  This is known as having negative equity.

If your mortgage loan includes negative amortization (your monthly payment is less than the interest you owe, the unpaid interest is added to the amount you owe), you may end up owing more than you originally borrowed.  If either of these scenarios happen, it can make it all but impossible refinance.

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