The topic of refinancing has become increasingly popular with the low interest rates as of late. Why is home refinancing so popular? Can you even save money from home refinancing? First let’s look at all of the factors involved with saving money by refinancing your home mortgage:
Lower interest rates.
At the moment, you can pick up a 15-year fixed mortgage at 4.02%. That’s a steal when you think about how high interest rates were a few years ago alone. A whole percentage or even a piece of percentage can save you thousands of dollars over the life of the mortgage. Think about how much 1% of $200,000. That is some major savings in the long run. This is why home mortgage refinancing is so popular at the moment.
Costs of home refinancing.
You must remember that the ultimate end goal of refinancing your mortgage is to save money on interest/your mortgage over the years. One aspect that many people often overlook is the actual cost of refinancing process (application, appraisal, lawyer, and home inspection costs). Will the lowered interest rate justify the cost of the process? This is one thing that you must strongly consider. You don’t want to go through the whole refinancing process only to find out that you saved yourself a few bucks here and there.
Before you start the home mortgage refinancing process, you must cover the following bases to ensure that the process will even work out for you:
Strong credit.
If your credit score is over 700, you’ll have a higher chance of being approved for refinancing. Before you go in to look into home refinancing, you must know where your credit score stands. If you go in with a poor credit score, you’ll not only be turned down but lots of your time will be consumed by the whole process.
Built up equity.
A mortgage that’s underwater will be impossible to refinance. It’s ideal to have at least 20% equity built up in your home. If not, the lender is going to give you a hard time and you likely won’t receive the mortgage refinancing that you applied for. This usually means that new home owners may have a difficult time with getting approved.
Cash flow.
What’s your income like? If you can prove that you have a steady paycheck, you’ll have a higher chanced of mitigating some of the risk for the lender. If you are currently self-employed, you might want to wait a little bit before you go out trying to refinance.
Have you considered refinancing your home mortgage? How did it go?
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Procedurally, refinancing is almost like buying the house all over again. You still need an appraisal, and you’ll still have to pay most of the closing costs. That can run more than $2500.
If your lender gives you the option to refinance, and you progress to the point where you’re seriously discussing it, the lender should have a chart ready showing your new monthly payments. Take the difference between your old and new monthly payment, then divide that into the closing costs.
If it turns out that it’s going to end up taking you 6 years to save any money by refinancing, and you don’t plan on holding onto the house that long anyway, don’t refinance.
Because refinancing requires a new 30- (or 15-)year obligation, you should only refinance if you’re fewer than 5 years into your existing mortgage. You should also do it only if there’s a big spread between your old rate and the new rate — at least 125 basis points.
One exception: if you’re already in an ARM or some other exotic mortgage, take the option to refinance as the gift from the financial sanity gods that it is. Refinance immediately into a fixed-rate
mortgage, even if the rate is 50 basis points higher than what you’re paying now. Even incorporating the loan origination costs, there’s practically no way you can’t save money on the deal. Unless you
have 1 year left on your mortgage or something.