When is Refinancing Worth it?
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You have a good interest rate and a payment you can afford but you hear on the news or read an advertisement telling you to refinance because the rates are low so you ask yourself, "Should I refinance?" Good question.
You could lower your interest rate (sometimes significantly) and reduce your monthly mortgage payment amount with a refinance. You might also have the ability to "cash out" a portion of your equity, which you may use to consolidate debt, improve your home, or finance a vacation. With lower interest rates, you might also get the chance to build up home equity more quickly by changing to a shorter-term loan.
For those who refinanced during the recession when homes values were down, you might have a great interest rate but have monthly mortgage insurance attached to your loan because you didn't have 20% equity. FHA's guidelines regarding the removal of mortgage insurance has changed several times these past years but most recently, FHA doesn't allow the removal of mortgage insurance unless you refinance out of an FHA loan. If you put 10% down, however, you can get rid of mortgage insurance after 11 years.
If you have a conventional loan and have monthly private mortgage insurance (PMI), you might be able to get rid of it by paying for an appraisal and asking your lender to remove it if the appraisal shows you have 20% equity. The rules vary by lender but if yours does, you may be able to avoid refinancing altogether if you already have a great rate and just want to get rid of mortgage insurance. The appraisal will cost you about $500 but definitely beats the cost of refinancing. When you pay your mortgage down to 78% of the original purchase price or appraised value (whichever is less) the lender is legally required to cancel mortgage insurance. The only way to know for sure the steps involved in removing mortgage insurance, call your lender and ask what their process is.
Please contact us for a free review of your loan papers to see what your options are for eliminating mortgage insurance. If your lender requires you to refinance to eliminate PMI, make sure you check our rates against theirs to ensure you are getting all your options.
You will have to pay closing costs for the refinance process. When you refinance, you are paying for most of the same things you were charged for when you got your existing mortgage. These can include settlement costs, an appraisal, lender's title insurance, underwriting fees, and so on. There are options to get a credit to offset the closing costs which involves taking a slightly higher interest rate upfront and getting a lender credit to offset the fees. You would still be responsible for any prepaid interest, property taxes and homeowner's insurance.
Do the Math
Paying discount points can help you attain a better interest rate and will save you money over the life of the loan from having a lower monthly payment; however, only buy points if it makes sense for you. We've found that for most people, it doesn't make sense to buy discount points because the break-even point is eight to ten years. Considering most people move or refinance every 5-7 years, buying discount points would not benefit the majority of our customers. Make sure your Mortgage Consultant calculates your break-even point to see how much time it would take you to recoup these upfront costs.
We can help you explore the effect a refinance might have on your total payment, whether you should refinance if you are likely to sell your home in the near future, and cash needed at closing, if any. Call us at 503-753-7577 to get you started on your no-obligation loan consultation.
Want to know more about refinancing? Give us a call: 503-753-7577.