Is now the right time to refinance your home? What does that even mean? What’s in it for you? Shawn Fehily is here to answer these and other questions as you consider refinancing.
ONE: IS IT RIGHT TO REFINANCE?
You may have visited with friends and family who refinanced their home, and wondered if they refinanced, should you? How do you know if refinancing is the best option to pursue?
Most homeowners decide to refinance when one or more of the following favorable conditions exist:
Your home has greatly appreciated in value: Occasionally, certain regions of the country experience a significant rise in home prices. Refinancing at a time like this is a good decision so that you are able to take advantage of your home’s increased equity.
Mortgage interest rates are falling: If market rates drop 1/2% to 5/8% below your current interest rate, it could be a good scenario for you to refinance your home. In a market where interest rates are falling, two potential benefits exist that could help lower the overall loan amount. The first option lets homeowners shorten the terms of their repayment while still making the same or comparable payment amounts. The other option allows homeowners to lower their monthly payments while keeping the same or comparable repayment term. Either way, homeowners find themselves with a way to save money on their mortgage investment.
You are early in your mortgage term: Homeowners who are in the earlier years of their mortgage term tend to find more advantages from refinancing. Refinancing at this point, when payments are mostly being directly towards interest, tends to benefit homeowners more than later in the life of the mortgage when payments are going more towards the principal than the interest.
CONSIDER IT ALL
Make sure that if you do decide to refinance, it is not an impulsive reaction to one, singular factor like suddenly falling rates. To make the best decision for you and your financial situation, you’ll want to consider all the contributing factors such as how long you plan to stay in the home and how going through the process would help you achieve your long-term financial goals.
It’s key to remember that refinancing starts homeowners off with a new mortgage entirely; it takes them back to the beginning of the process. But, the benefits of starting over with a new mortgage may be entirely worth it. Homeowners are able to:
Change their loan from a balloon or an adjustable rate mortgage to a fixed rate mortgage and thereby lower the risk of a changing interest rate.
Decrease the amount of their monthly mortgage payments by lengthening the repayment term or changing to a lower interest rate.
Condense the repayment term of the loan or benefit from the lower mortgage market rates which allows homeowners to decrease the interest costs of the life of the loan.
Shorten the term of their loan and end up paying off the loan quicker.
All of this frees up other funds to help consolidate other debts and put towards other expenses such as college fund, retirement, home improvements, etc…
TWO: WHAT IS THE BEST CHOICE?
When making the decision to refinance, you want to make sure to choose wisely. You want to avoid ending up locked into a mortgage scenario that will hinder your financial goals. The key is to consider all your options and choose the mortgage program that will best meet your needs.
With a fixed rate mortgage, your monthly mortgage payments stay the same since they are set with an interest rate that does not change for the life of the loan. This plan will provide you with established and predictable monthly mortgage payments. Likewise, the fixed rate also will protect you against your payments rising with rising rates.
The rate of on an adjustable rate mortgage is designed to change with the movements of the market index to which it is linked. Interest rates are initially lower for a set period (ranging from 1 to 10 years) than those of fixed rates loans. However, after the initial set interest rate period, interest rates may rise — causing your monthly payments to increase as well. At that point, the amount of your payments is determined by the direction, up or down, of the market index. ‘Rate caps’ are established to put a limit on how high or low your rates can go.
While rate-term refinances can change the repayment terms or decrease the interest rate or both, a cash out refinance provides a higher loan amount than the current mortgage. This excess then can be used to consolidate debt, put towards home improvements, dedicate to educational funds or other investments.
With the many different loan programs that exist, repayment schedules can vary greatly. Ten to thirty years are the most commonly found repayment schedules with the 10 year mortgages typically offering lower interest rates than those found with 30 year mortgages. Likewise, you would pay substantially less in total interest if you were to stay with the 10 year mortgage through the life of the loan.
A shorter term often is the best choice if you plan to own the home for the full life of the loan. Although this can set you up with higher monthly payments, it will decrease your interest rate and reduce the amount of interest you pay overall.
On the flipside, if you have plans to own the home for less than seven years, you may be best served by going with a longer term of repayment. While this could set you up with a slightly higher interest rate, it could provide you with lower monthly payments since they are spread over a longer period of time.
THREE: HOW DO YOU GET READY FOR CLOSING?
As your closing date approaches, you’ll want to be sure to stay in good contact with your Loan Officer. Although you’ve purchased a house and gone through the closing process before, you want to make sure the refinance process goes smoothly as well. Being aware and prepared will always pay off in the end.
Documents: Verify that you have the documentation needed to move forward into closing.
Credit: Review your credit history. To make sure you have good credit standing, refresh yourself on how your credit score is derived and also ways to keep your credit clean.
Insurance: Confirm that your insurance policies provide appropriate coverage for your home’s value and contents. Also double check that the policy reflects the name of your refinance lender as the payee for losses.
Rate: Consult with your Loan Officer about locking in your interest rate before you close. Landing on a rate before you close will provide protection for you if rates should rise before your closing date.
Escrow: Examine your current loan’s escrow account and determine if a surplus or deficiency of funds exists.
Closing Costs: Arrange to bring to your closing appointment a cashiers’ check made out with the exact amount you’ll need.
FOUR: HOW DOES THE CLOSING FOR A REFINANCE WORK?
As with the closing for your purchase, you’ll have several documents to sign at the closing for your refinance. Your former mortgage will be closed out, and you will begin again under the new loan structure established in your refinance agreement.
The process is clean and simple when you work with Shawn. At this point, you are able to enjoy all the benefits that refinancing your home provides!