Should I Refinance My Mortgage?
“Should I refinance my mortgage?” is a question that many people are asking right now due to low interest rates. The answer to “should I refinance” is going to depend on your individual situation, but here are some things to look at that can help you decide.
For starters, you’ll need to know the following:
- The interest rate and APR on your current mortgage
- The type of mortgage you have (Is it a 30-year fixed? A 5/5 ARM? Interest only? etc. Does it have a pre-payment penalty?)
- The length of time you plan to stay in your home
- The value of your home compared to the amount you owe on it
- The rate you’d be able to get on a refinance
- And the costs associated with refinancing
Where to find the information
You can find your current interest rate, APR, type of mortgage, and whether or not it has a pre-payment penalty by looking at your paperwork or contacting your mortgage company. You’ll also be able to find out the amount you owe by contacting them.
The value of your home will probably be determined by an appraisal later, but you don’t need to have an appraisal done in these early stages. Instead, look at what similar homes in your area have sold for recently to get an idea, or ask a Realtor if they can provide a market analysis.
Keep in mind that unless you are going through manual underwriting, your credit score will have a big impact on the rate you’re offered. You can find out the current offerings of credit unions, banks, and mortgage companies by doing a little research on the internet. Keep in mind that they’ll show the best rates, which may or may not be the same as what you might qualify for. Pentagon Federal Credit Union and ING often have specials, and a quick Google search for “mortgage rates” will bring up many options.
Don’t forget about the costs
Costs will vary depending on who will be doing the refinance and what is required, but obviously you want these to be as low and few as possible. Associated costs could include an application fee, appraisal fee, tax service fee, CLO access fee, flood certification fee, recording fee, title fees, transfer fees, credit report fees, survey fees, attorney fees, reconveyance fees, document prep fees, points, and more. If you decide to go ahead with a particular lender, all of the fees must be disclosed on a Good Faith Estimate form if you request one. At this stage you’ll just be getting estimates though, which are not binding. If your current loan has a prepayment penalty, don’t forget to take that into account too.
Crunching the numbers
So now that you’ve got all that information, you can figure out the answer to “Should I refinance?”. The easiest place to start is by seeing whether or not you owe less on your home that it’s probably worth. If you do, you’re in good shape and can check things out further. If not, you’re not going to qualify for a refinance without bringing money to the table or participating in a special program.
Next up is your current interest rate and APR vs. the rate you could likely get. Conventional wisdom says that the rate should be at least 1% lower to make a refinance worthwhile, but there are other factors that might come into play there.
For example, if you’re going to be moving in the near future, a refinance isn’t likely to be worthwhile because you probably won’t be in the home long enough to recoup the costs. On the other hand, if you currently have an adjustable rate mortgage that’s at say, 4% right now, but that could adjust up to 9 or 10% over the life of the loan, it’s probably worth it to refinance to a fixed-rate mortgage even if the interest rate is the same. You may also want to refinance because you want a shorter term, a different type of loan, or lower payments.
Estimating how much you might save
A simple way to estimate how much you might save if you decide to refinance is to multiply your current mortgage balance by your current APR, and then find the difference between that and the new APR. For example, if you currently owe $100,000 on your mortgage and have an APR of 5%, you would pay $5000 in interest over the next year. ($100,000 x .05 = $5000.) If you were to refinance to an APR of 4%, you would pay $4000 over the next year. ($100,000 x .04 = $4000.) So over the course of the next year, you’d pay $1000 less if you were to refinance. If the costs associated with refinancing added up to $3000, then it would take you more than 3 years in this example to break even. After that, you’d start seeing the savings.
Unless your aim is strictly lower payments, don’t mistake that with actually saving money in the long run. For example, if you’ve already had your current mortgage for 10 years out of a 30 mortgage, and your refinance to a new 30-year mortgage, your payments will probably be less because the effect is similar to extending the length of the loan. But you’ll almost certainly pay more in interest, even if you have a lower interest rate, because you’re adding on an extra ten years.
Taking the plunge
If you answer “Should I refinance” with yes, be sure to check out multiple lenders before taking the plunge. That doesn’t have to mean applying with multiple lenders, but it should mean investigating the costs and what will end up as the best deal for you overall. If the answer is no, remember to check back every couple of years in case it becomes worthwhile later on if things change.