When to Refinance
Generally, there are two good times to refinance your home mortgage.
1. If you have an Adjustable Rate Mortgage, or ARM. Adjustable Rate Mortgages offer a low fixed rate, often for a period of 3 or 5 years. After the fixed period, it begins to adjust monthly, or yearly, depending on the index it is based off of. If you refinance to a low fixed rate mortgage, you avoid the higher monthly payments when the interest rate adjusts.
2. The other good time to refinance is when you’ll save money by getting a lower interest rate. In this case, you’ll want to be sure that the drop in your monthly payments will pay back the closing costs, plus save you more money over the life of the loan. Homeowners spend an average of 7 years in a home. So if you do not think you will stay in your home long enough to recoup the fees, plus save more money, refinancing will do the opposite of saving money, it will cost you more.
If you are experiencing cash flow difficulties, you may be tempted to lower your interest rate. From a savings perspective, this is not a good reason to refinance. Unless you get a lower rate and payment, and recoup the fees as part of the bargain, you’re really not saving money.
Also take into account the term of the loan you will receive. If you started with a 30-year term, and refinanced after paying on the loan for 5 years, you will want to look for a 20-year term to ensure you don’t pay more interest over the life of the loan. Let’s assume you refinanced $200,000. You paid total closing costs of $7,000. You will now be saving $80 a month, on a 30-year term. This means you will have to keep this loan for approximately 7 ½ years to recoup the closing costs. However, over the life of the loan (30 years) you will have saved $21,000, after paying back the closing costs.
No Cash Out vs. Cash Out Refinancing
No cash out refinancing is when the amount of your new loan does not exceed the initial amount of your current loan, including closing costs. It is used to reduce your interest rate, or go to a fixed rate. With this type of loan, FHA offers a no appraisal option, affording that the new loan amount does not increase above the old loan amount. A cash-out refinance allows you to pull equity out of your home in the form of cash, to do anything from pay down debts, make large purchases such as automobiles, student loans, weddings, travel, investment properties, or unexpected health care costs.
Interest paid on your refinance in generally tax-deductible, but consult your tax advisor to see if this is true for you. The disadvantage of this approach is that this loan is secured to your property. If you are unable to continue with the monthly mortgage payments, you run the risk of foreclosure. Credit, and automobile lenders cannot take your home of you are not able to pay. Also, using your equity to pay off credit card debt makes it tempting to run up credit balances once again.
Consider this when you are thinking of a cash-out refinance:
- Your saving will make the refinance worthwhile
- You’re sure that you can afford the new monthly payment
- You trust yourself (and your spouse) to not run up the repaid debt again
Below are some good scenarios of when to refinance your mortgage
- You will see at least a 1% drop in interest rate
- You are going from an Adjustable Rate to a Fixed Rate
- Home improvements that will add value to your home
- You will save money monthly, and over the life of the loan
If you would like to know if you will qualify for a home refinancing loan, contact Lyn!