The decision to refinance can be something that requires careful consideration, time and energy. If you’re thinking about refinancing here are some things to consider…
What is the number one net tangible benefit to do this refinance? This is by far the most important consideration you need to ask yourself. Is it worth all the paperwork to go through along with getting an appraisal in exchange for meeting your financial calls? Only you can make this determination. For example, one such benefit of refinancing is the ability to cash out refinance to pay off debt or to do a home improvement. An alternative might be a home equity line of credit however the payments with today’s low mortgage rates are probably almost equal anyway. Another thing to consider is cashing out to fix up your home which is building sweat equity. By cashing out to pay off junk debt such as high interest credit cards and consumer loans which typically contain rates of 10 percent or more you can probably save money by refinancing nor consolidating your debts in the one lump monthly payment.
Several hundred dollars a month can go a long way for savings and planning for the future.
Generally speaking to refinance from say a 30 year fixed to a 30 year fixed, it only makes sense to do so if you’re saving a substantial amount of monthly mortgage payment or if your interest rate is going down at least 75 percent in rate or lower if you’re going to pay closing costs. If your lender is offering you a no points, no fees refinance, you generally want to save at least a half a percent in rate. Otherwise to save an extra $20 a month for example based on whatever your loan amount in interest rate it might not be worth it for all the paperwork and the hassle. A good measure of thumb for a no-cost refinance is to save at least a half a percent in rate or more.
If you purchased your home last year or in the last couple of years, the other big opportunity is to explore refinancing by getting rid of monthly PMI private mortgage insurance or lowering your interest rate or a combination of the two. It’s not uncommon that if you purchased your house in 2018, 2017, 2016 or even in years earlier that you could refinance into the low 4s and not have monthly PMI with 20 percent equity in your property or using a wonderful Mortgage Loan program called single pay PMI where the PMI is financed one time into your payment lowering your house expense.
If your rate is 4.875 percent or higher.
If you have a desire to go from a 30-year mortgage to a 15-year mortgage you should refinance if you can handle the monthly payment because with excellent credit rates on 15-year mortgages are under 4 percent.
If you have monthly PMI on your loan regardless of your interest rate.
If you have Consumer Debt and equity in your property and you can consolidate your debt and save the monthly differential, you should refinance. If you’re going to pay closing costs when you refinance you also want to take into consideration how quickly you can recuperate those monies. The shorter you can refinance and the more quickly you can nimbly bounce back, the better off you will be for another market opportunity which is why doing no points or no fees refinances as rates go down is a far more lucrative and financially beneficial proposition. However, assuming you’re not doing a no-cost refinance and you’re paying traditional closing costs you take the monthly savings that you’re generating as a byproduct of refinancing the amount of closing costs associated with the loan. For example, let’s say you’re saving $325 per month and the closing costs associated with the loan that you’re refinancing is $2,800. Doing that math, you would recuperate your money in 8.6 months. If you keep that mortgage for 8.6 months or longer you recuperate your money and you’re effectively made whole again. If, however you refinance prior to 8 months (which contrary to popular belief, you can do these loans and do not contain prepayment penalties) anymore, you will lose money because you’re refinancing faster than your original recuperates time frame. Another reason to consider letting the lender cover your closing costs for you if you feel there is a net tangible monthly benefit.
If you’re going to be refinancing do yourself a favor and work with a local lender who is experienced who understands mortgages and can help you navigate the different programs and options that are available to best support your desire to achieve your financial goals.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.