The reasons why you should refinance are endless; however, it’s all about timing and research. Getting these two aspects right the first time can save you money for a family vacation, renovations, a new car, a new speedboat… you get the point. Some might want to refinance to lower their monthly payments, others to consolidate outstanding debt, and others just to find a better mortgage product to suit their needs.
Think of it this way; are you the same person you were 5, 10 maybe 15 years ago? If you’re like anyone else, probably not. You may have found a new job or need a change in your mortgage product, from an ARM to a fixed-rate mortgage for example.
There are certain rules to follow so that you don’t end up defaulting or wasting money. The traditional refinancing rule of thumb – wait until you find an interest rate at least 2% lower than what your rate is now. Although it’s usually true it can be inaccurate because in the time you wait for the rates to drop 2%, you could have already spent several thousand dollars on your current mortgage. For some people, as little as 0.5% of a decrease in rates can be enough. The best thing to do here is to really do your research and understand the market as well as possible so that you know when refinancing is best for you.
Another factor when refinancing is your future plans with the home. Generally, some plans such as a balloon mortgage will require a refinance when the period is over. But if refinancing is not mandatory, you could have to wait as long as you stay in the home to refinance. The key thing is to be truthful no matter how much you love your home. Figure out how long you think you will be living at the home. Timing is crucial so understanding when to refinance and when you will start saving money only comes with research. The fact is that refinancing can cost a great amount of money, so you’ll want to be as certain as possible of your situation with for example, if your employer will relocate you to another city, or that you’ll change jobs soon. Do you have a physical condition that would force you to move? Evaluating your situation now and in the future is very important so try not to cut corners on this step.
The next step is to figure out if you need more or less of a mortgage. Most lenders will let you borrow about 80% or more of your home’s appraised value; however, if you’re looking for a ‘cash-out refinance’ it could be lower than 80%.
Now that you know why you may want to refinance, how long you’ll be staying at your home, and how much of a loan you need, we can look at possibly the most difficult part of a mortgage – the closing costs. The closing costs are what you pay out of your pocket to refinance your mortgage. While some closing costs are preset, others are dependent on your local market. Figuring out your closing costs can take some time and effort because they can cost up to $5,000 and will determine how much you save when refinancing.
As you may remember from getting your first mortgage, several other services are trying to charge you – appraising your property, researching your title to the property, insurance, credit reports, and inspections for varmints, safety, and structural factors. These services can easily add up to a few thousand dollars and they will save you money in the long run but there are ways in cutting these costs. For example, you can update your title insurance instead of getting a completely new one. Shopping around and comparing as much as possible can also save you money from these fees.
Remember, a mortgage is like buying a vehicle. You wouldn’t run to any car dealership and buy the first car you see, would you? The same goes for a refinance as well, do your research, talk to a lot of different lenders, compare rates, and look into the future of your home.