If you’re a homeowner, you’ve probably thought about or heard your neighbors talk about refinancing. There is no question that mortgage interest rates are at historic lows and that means it may be a great time to either buy a home or refinance your existing home mortgage into a loan that better suits your situation.
According to the Federal Reserve, 5.7 million homeowners refinanced their mortgages in 2009 alone – and here’s an even more staggering fact: 45 percent of all FHA loans between 2000 and 2009 were refinanced.
I confess I fall into that category -- so call me a serial refinancer. I continue to try to get the best interest rate I can on my home loan. I have certainly learned a lot from my experiences and I’m willing to share.
So if you are like millions of Americans, the question you are probably asking is, should I refinance my home mortgage?
Here are the 10 things I think about when I refinance.
1. Are the fixed interest rates lower than my current rate? Just how much money will I save a month? A year? Over the life of my loan?
Your mortgage may be at a variable interest rate or it may be at a fixed interest rate. I only enter into loans with a fixed interest rate because I like to know what my principal and interest payment will be for the life of the loan.
Refinancing to a lower fixed interest rate will undoubtedly lower your monthly payment. However, remember that every time you refinance you are entering into a new loan and you are starting over. If you have been in your existing loan for many years, refinancing to a lower rate may save you money on your monthly payment, but will you pay more over the life of the loan.
Also, remember that at the beginning of the loan, most of your payment goes toward interest, not principal, so you’ll want to take that into account.
2. Should I take out a 30-year loan or a 15-year loan or some other duration of loan?
A 30-year loan will have a lower monthly payment than the 15-year loan, but you will also pay more interest in the long run. The 15-year loan will have a larger monthly payment but you will pay less interest and you will pay off your house faster.
Me, I always opt for a 30-year loan because I don’t want to be locked into the higher payment each month. I want the lower monthly payment and the ability to pay more if I would like to, allowing me to pay off my house more quickly. This approach requires discipline, however.
3. How many years am I into my existing loan?
Remember, every time you refinance you enter into a new loan and start over paying more interest than principle. Just because it sounds good to lower your interest rate and your monthly payment, it may not be the best move at this point if you have been in your loan for a long period of time.
Explore shorter loan terms, like a 20-year or 15-year loan when you are in this situation. See number 2 above.
4. What are my closing costs going to be?
I know that someone is making money somewhere in these re-fi deals. I just make sure this fact is not impacting me negatively. I try to ensure that I am not being charged points, that my broker pays my closing costs, and that no closing costs or points are being rolled into my new loan amount. I also make sure that my loan amount will remain the same and that I am not paying anything out of my pocket for the refinance.
If you have good credit and a steady job, you should be able to find a mortgage broker that will do the deal and pay for your closing costs. Now, you can always lower the rate the bank will charge you by paying points or paying closing costs. For my money (so to speak), I would rather have the slightly higher rate and not have to pay closing costs or points.
I mean, we are talking a 0.25 percent difference here. For me, this decision is a no brainer with interest rates as low as they are these days.
5. Who is going to be my mortgage broker? Are they reputable and efficient?
A good mortgage broker can really make a difference. Find one that comes highly recommended and one you can trust. Make them explain in detail, in writing, and in layman’s terms, what you are getting. It is so easy for them to use jargon and act like you should know what everything means. You should ask questions and make sure they can answer them to your satisfaction.
6. Do I want to take equity out of my home?
If you have equity in your home, you can increase your loan amount and take cash out. You can also have a home equity line of credit (or a HELOC). Again, ask questions and understand that before you take equity out of your home, you are clear on what that will do to your monthly payment amount and your monthly budget.
7. Should I put more money into my loan (like an additional down payment) to lower the principal amount of my loan and thus lower the monthly payment?
I have done this in order to lower my monthly payment. I have two small children and it was time for my wife to stay home with them, which meant losing our second income. At the time, I wanted to take advantage of the lower interest rates as well as significantly reduce my monthly payment.
Think of it as an additional down payment. Also, you may need to put money into the loan if your appraisal was not high enough and your loan-to-value ratio is not where it needs to be in order to get the interest rate that you want. Again, ask your reputable mortgage broker.
8. Could I benefit from skipping a monthly payment?
Every time you refinance you get to skip your next mortgage payment. That is always a positive because you get to have a bit more cash flow in the month in between.
9. Am I getting the whole story – including the additional cost of insurance and taxes (escrow payments)?
It is easy for the broker to say, “Your new principal and interest payment will be _$X_”. They can make it sound so inviting when in fact, that is not the whole story. Your escrows (taxes and insurance) are also part of your monthly payment, so make sure you take those into account when refinancing. Also, I have found that you can lower your payment if you shop your homeowner’s insurance.
10. Am I ready to deal with the hassle?
All of the above are good things to think about, but certainly not everything to think about. However, the one thing that I always want to keep in mind is how big of a hassle it is to refinance. I hate filling out the forms and just dealing with the process. If you are like me, this will be part of your thought process when you decide on whether or not you will go forward with refinancing your home mortgage.