Consider These Things Before Refinancing Your Home

As costs continue to rise across the board, consumers are looking for more ways to save money and cut corners. One of first places we look is at our mortgage, because it’s generally the highest outlay of the month. We see advertisements about how refinancing can save us thousands of dollars. But is it the right decision for you?

What is a Refinance?

When you get a refinance (or remortgage), you actually sign completely new loan papers. Some of the terms that might change include:

• Lower monthly payments
• Lower interest rate
• Change in loan terms (for example, switching from 15 years to 30 or vice versa)
• Change in type of loan

Should I Refinance?

Not everyone will benefit from a refinance. But if you pick the right time, you can reap a lot of benefits! For instance:

• You can lower your monthly payments and use the extra cash to meet monthly expenses and/or put together an emergency fund
• You can change an ARM or balloon mortgage to a more beneficial fixed-rate mortgage
• You can score a lower interest rate; to make it worthwhile, you’ll need to save at least 1 or 2 percentage points.

Always shoot for a 15-year fixed if you can; you’ll pay off your house sooner and save a TON because you’ll be skipping 10+ years of interest payments!

It really pays to shop around for interest rates because just one or two percentage points makes a HUGE difference. Here’s an example:

• Total interest on a 15-year fixed-rate mortgage of $250,000 is $117,687 at 5.5% and $82,860 at 4.0%. That’s over $34,000 in savings.

Counting the Cost

Don’t forget that refinancing costs money; after all, you’re closing on a new loan and that means closing costs. You can check here to get an idea of current estimates. Shop local and online banks because they do compete in terms of closing costs and services.

Getting an idea of what your remortgage will look like starts with calculating your payments using an online tool. The repayment of your loan over a period of time is called amortization and you can create printable amortization schedules to get a visual of what your new payment terms would look like going forward.

To calculate your remortgage, just plug in these numbers:

• Current loan balance
• Cash/equity (if any) that you will withdrawal
• Interest rate
• Term (choose the number of years you’ll spread the payments over – generally 10, 15, 25 or 30)

What are the First Steps?

If, after running the numbers, it looks like a win for your home, the first things you’ll do on your way to a refinance are:

• Get your home appraised to determine fair market value
• Gather required documents for the application like proof of income, ID, tax returns, bank and mortgage statements, homeowners insurance and property tax bills.
• Decide whether you will be paying for closing costs up front or “rolling” them into your new loan (if the bank offers this option).

In summary, only you can determine if refinancing is a good idea right now. It depends on your situation, and I hope the tips I’ve shared today help you in that decision-making process.