Does it make sense for you to refinance your mortgage? These are the 4 things to consider

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Should you refinance your home loan? It’s a complicated question – and a variety of factors will determine whether or not it makes financial sense for you right now. But if you bought your home before 2020, or haven’t refinanced since, it’s worth giving this serious thought. Interest rates are so low – like, near their all-time lows, that for the vast majority of homeowners in the United States, refinancing will likely make sense. And even interest rate are only part of the calculation of your own situation.

Refinancing has many benefits, including lowering your monthly payments, reducing a shorter loan term, and being able to withdraw money to finance home renovations, debt consolidation, and eliminating a mortgage. expensive mortgage insurance. Once you identify your “why” you will be in a better position to move forward.

“The decision to refinance really depends on the length of your mortgage, the existing terms of that mortgage, and how long you plan to keep any type of mortgage on your existing property,” said Robert Heck, vice president. mortgage at Morty, an online mortgage marketplace. “Depending on how someone answers these questions, that will determine whether refinancing makes sense or not. “

Here is an overview of the four main factors to consider in determining if refinancing is right for you and your personal situation.

Your interest rate

Comparing your current interest rate with current rates will play a major role in deciding whether refinancing makes sense. A low interest rate on its own can provide enough boost, and historically low rates will increase the likelihood that a refi will make sense to you. Although the prices are start to climb, they are still low, with an average 30-year fixed rate slightly above 3% and the average 15-year fixed-rate mortgage rate hovering around 2.5%. You have to watch mortgage rates carefully, however, as they change daily.

“These are moments of unprecedented volume” in refinancing, said Bill Banfield, executive vice president of capital markets for Rocket Mortgage. “Why is there so much volume? Because it makes sense to most people.”

Your fairness

If you bought a home 10 years ago and paid a decade of interest on the principal of a 30-year fixed rate mortgage, you’ll be in a much different situation than when you bought their home. two years ago or made interest payments only on one adjustable rate mortgage. Using a mortgage calculator or looking at amortization tables can help you determine how much principal and interest you actually paid back.

And you may have paid off more of your mortgage than you think. With a fixed rate mortgage, “the percentage of your monthly payment that goes towards building equity in your home increases over time. It’s not always very obvious on your mortgage statements, ”Heck said.

One option that makes sense for some homeowners with solid equity in their home is cash refinancing. Cashing out is not for everyone, but a gained popularity as home values ​​rose across the country in response to the COVID-19[female[feminine pandemic. As homeowners simultaneously gained more equity in their home while spending more time at home, the idea of ​​taking money out and reinvesting it through home improvements has become more appealing to many Americans. But if you’re not looking to do something special like home renovations, a withdrawal may not make much sense.

Your type of mortgage

The type of mortgage you currently have will also help determine if refinancing is a good financial decision. If you have a adjustable rate mortgage and your monthly payments have paid off the interest but not the principal – a common feature of ARMs – refinancing could actually cost you more over time.

You need to determine if your upfront charges combined with the lower interest rate on a newly refinanced mortgage will actually cost you less than your current interest payments, advises Heck. This equation will depend on your specific type of loan.

Another common type of loan is a FHA loan. With support from the Federal Housing Administration, an FHA loan is designed for people with a bad credit history or insufficient savings for the traditional 20% down payment. In 2021, you can get an FHA loan with just 3.5% drop – but you will have to buy mortgage insurance, which will increase your monthly payment. Some FHA loans also have higher interest rates than a conventional fixed rate mortgage.

Refinancing can allow you to get rid of mortgage insurance while lowering your rate, a win-win. “If you’re on an FHA mortgage, now is a great time to think about refinancing into a conventional mortgage and getting out of mortgage insurance,” Banfield said.

How long do you plan to stay at home

If you plan to move soon, refinancing may not make sense.

Typical closing costs are 2% to 5% of your loan – around $ 2,400 on average in 2021, according to Bankrate. Many homeowners build closing costs into their new mortgage to avoid having to pay a large lump sum, but you will need time to recoup the expenses.

If you’re planning on saying goodbye to your home over the next two or three years, a refi probably doesn’t make financial sense, said Linda McCoy, chair of the board of directors of the National Association of Mortgage Brokers.

The bottom line

One of the most common mistakes people make is assuming all loans and all rates are the same, McCoy said.

“There are thousands of different programs and prices,” she said. “People think that because their friend has a rate, they should get that rate, but they don’t understand that there are so many variables that make up the rate you’re going to get, like your credit score and the amount of. your loan. “

Before you can officially refinance, you must have good credit, and proper documentation for critical aspects of your financial life, such as proof of income, bank statements, and a debt-to-income ratio. From there, a lender or mortgage broker will determine if you qualify for refinance.

Whatever your reason for refinancing, you should only do so if you benefit financially in the long run. “You are really trying to make sure that you are really getting a net tangible benefit from the refinancing,” Heck said. Otherwise, historically low interest rate or not, you will not get any financial benefit.


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