Sometimes refinancing a home can be a smart financial choice. This is because restructuring payment plans can help you spend less on your mortgage each month, allowing you to save up for other areas of your life, like building up retirement or medical funds.
While many factors can affect your choice to refinance your mortgage, we’re going to cover the most common scenarios so you can make the best financial decision:
When You Should Consider Home Refinancing
There are a few questions to ask yourself before you choose to refinance your mortgage. Here are a few to get you thinking:
Will Refinancing My Home Secure a Better Interest Rate?
When it comes to interest rates on mortgages, better = lower. The quest for a lower interest rate is one of the most common reasons homeowners choose to pursue refinancing. But, if you are trying to decide if you should consider home refinance, it’s essential to read the fine print.
Often, interest rates need to fall a 1.5% to 2% to actually make a difference because of the costs involved in the refinancing process.
What’s my Credit Like?
If your credit has significantly improved since you first purchased your property, then it might be time to consider refinancing your home. This is because higher credit scores usually correlate with lower interest rates.
How Much Longer Do I Want to Live Here?
If you plan on moving within two years of refinancing, then it’s probably not a good idea to restructure your mortgage. On the other hand, if you are nearly finished paying off your home, it’s also not a great idea to refinance, simply because of the costs involved.
If you are curious about whether or not it makes financial sense, all you need to do is divide the total amount of refinancing fees by the amount you’ll be saving on your mortgage each month. The answer you get is how many months it will take to recover from refinancing.
If you plan on staying in your home past this point, then it could be a good time to consider home refinancing.
Do I Want to Switch Mortgage Types?
Occasionally, the motivations for refinancing a home have less to do with financial savings and more with obtaining peace of mind, although both can be achieved. Homeowners in this situation will choose to switch from an adjustable rate mortgage (ARM) to a fixed rate mortgage (FRM).
ARM’s are usually popular at the onset because of their initial low-interest rate. The downside, however, is that these rates tend to fluctuate over time. Refinancing and switching to an FRM offers more predictability, thus making long-term financial planning easier.
Different Options for Refinancing
If you are still wondering about if you should consider home refinancing, then you need to know about the three different ways that you can refinance your mortgage:
Cash Out Refinance
In a cash-out refinance, you convert a portion of your equity in your home into cash. Then, you can use that money to pay the closing costs associated with refinancing. Homeowners typically use this option if their home’s value is skyrocketing, as it’s an easy way to quickly access the money needed.
Rate and Term Refinance
This is a simple refinancing option that can alter your mortgage rate, the length of your loan, or in some cases, both. Usually, the interest rates for these types of refinances are lower than in cash outs.
Limited Cash Out
This is very similar to the rate and term refinance option, but instead of paying the closing costs of the deal, they are simply tacked on to the end of your loan.
The Costs of Refinancing
Homeowners should generally plan on paying about 3% to 6% of their home’s outstanding principal in refinancing costs, plus any prepayment penalties.
However, the actual costs of refinancing vary based on the lender you choose to use. Even so, the basic transaction fees tend to be the same across the board.
Here are the most common ones:
Mortgage Application Fee
Lenders will typically charge you this fee to cover your credit check and the processing of your loan.
When determining the new rate for your mortgage, lenders will want to appraise your home to determine its worth. The appraisal agent will charge a fee for his services.
Loan Origination Fee
This fee is charged for the underwriting and funding of your new loan.
Much like during your original closing, your lender will perform a title search to ensure that no one else has a claim to your property.
The purpose of mortgage insurance is to protect the lender in case you default on your loan. Whether or not you need to purchase mortgage insurance if you refinance your home depends on your specific loan program and down payment amount.
Looking for an agent to guide you through the refinancing process? With great services for a flat rate, you’ll wish you used Clever sooner! Call us today at 1-833-2-CLEVER or fill out our online form to get started.