When is the best time to refinance your home loan?
I am surprised at the headlines and stories I read which supply a canned answer to this question, as if there is an answer which applies to everyone equally. Many articles discuss how to refinance a home loan, but give no attention to the question, should you refinance? The decision to refinance is an individual one, and should be answered by looking at your personal circumstances, as well as overall financial goals. The old belief that you should only refinance your home loan if you can obtain a rate a percentage point or so lower than your current one isn’t necessarily true. Refinance home loan rates are only part of the equation.
Here are some points to consider when you are deciding to refinance your home:
What are your overall financial goals? These are big questions that take into account many different things – for instance, why are you thinking of refinancing? Do you want to restructure debt, lower your payments, or get out of an adjustable rate loan to gain more security? Or do you simply have a high interest rate due to bad credit or an old loan? Are you looking for to refinance a home loan with no closing costs?
Use caution when presented with the idea that refinancing helps you pay off debt. It does not. It simply allows you to restructure it. For many consumers, this idea will still make sense, if you are facing many monthly payments which continue to add up, as well as high interest rates. Are you thinking of pulling equity out of your home for a remodel? Or do you just want to pay off some credit cards? If you are a consumer who is prone to running up debt, it may not be beneficial to refinance as many consumers end up in a worse financial position in the long run. Being honest with yourself and your personal goals is a very important part of the process. However, if approached carefully, a refinance can in fact be a good way to bring debt under control.
Can you refinance into a better loan? Do you have an adjustable rate loan that can reset to a high interest rate? Are you in a loan program, such as FHA, that requires mandatory mortgage insurance that cannot be removed? Perhaps now the value on your home has increased and you do not need mortgage insurance. These are all valid reasons to consider a refinance of your home. Remember also that securing a lower interest rate can allow you to build equity in your home faster. You can consult with your mortgage professional to determine any and all mortgage loans which you might qualify for. Some consumers are also stuck with expensive home equity lines, where rates can reset and payments can increase dramatically. Since this is a debt already secured to your home, it may make sense to combine that into one payment.
Evaluate where you stand now. If you have twenty years left on your mortgage, but a high interest rate, it may not be prudent to refinance into a new thirty-year mortgage. Check into different options such as fifteen-year loan products. These shorter-term loans not only offer even lower interest rates than thirty-year loans, they can shorten the life of the loan, potentially saving you thousands in interest, as well as getting free from a mortgage faster! Sitting down with your mortgage professional will allow you to thoroughly evaluate where you stand in terms of credit score (which translates into how much you will pay for your new loan), who can then offer suggestions for improving your position, and will help you break down the overall costs of all of your options.
What is the true cost of the refinance?
In addition to potentially adding years to the life of your loan, a refinance carries with it costs. An experienced mortgage professional can show you virtually endless options to minimize these costs based on your desires, but once the “bottom line” is discovered, you will need to decide for yourself, and weigh the cost vs. benefit. For instance, if you end up paying $2000.00 in closing costs to refinance, but the savings are $200 a month, it will take you ten months to recoup the cost of that refinance (in other words, where you are moving in a positive direction of savings).
If you are also adding time onto your mortgage, you will need to decide if that cost of both dollars and time is worth it to you. Additionally, if you are planning on selling the home within a few years anyway, it may not be worth the trouble or cost (maybe you are near retirement, or need to move frequently for a job).
Finally, it is incredibly important to know that there is no such thing as a “no closing cost” mortgage. The lender or bank will always be paid for their work; it’s just a matter of how they get paid (or who pays them). Closing costs can (or will) be paid in several ways – through origination points, a higher interest rate or a higher loan amount. Big banks or online lenders will always get paid for their service, and will not always hold a client’s best financial interests at heart.
Getting what appears to be a “great deal” on the surface is not always the case if you have a big bank who isn’t listening to you, and your individual needs before having you sign away on the dotted line.
Where to go from here?
Move forward carefully when deciding about a refinance, or any type of home loan. It is important that you are working with a mortgage professional who will take the time to discuss your individual circumstances with you, evaluate options and not pressure you into making a rash decision. Your lender or broker should be your advocate, and ensure a smooth, transparent process that presents the best options for you.