Should You Consider Refinancing Your Mortgage?
If you've been a homeowner for a little while now, you may be asking yourself the all-important question, "Should I refinance my mortgage?"
Generally speaking, experts say refinancing is worthwhile when you can lower your rate by half a percentage point or more. The exact amount, of course, depends upon the terms of the loan. That kind of money really adds up over time so you can keep more of what you earn.
Whether you are looking for a shorter loan term, a lower monthly payment, or have general questions about if refinancing is right for you, there is a lot to think through. Before you move forward with refinancing, factor in the following considerations.
Non-Rate Reasons to Refinance
A lower interest rate isn't the only reason why it may make sense to refinance. Here are a few non-rate reasons to refinance. (link to non-rate reasons blog)
Shorter loan term – If you are looking to pay less interest and a larger monthly payment, you may find it beneficial to refinance to a shorter-term mortgage. It will be a larger monthly cost, but you’ll pay it off faster and with less interest.
Switch from ARM to FRM – With an adjustable rate, your rate may increase beyond what you’d pay with a fixed rate. If interest rates start rising, it might be too late.
Your home is worth more - Homeownership is a smart investment, especially these days, as more homes are appreciating in value. As noted by Credit Karma, refinancing your mortgage with more equity available can provide added funds to pay off other expenses.
What if you have a Jumbo Loan?
Jumbo loans are non-conforming mortgages that exceed the limits set by Freddie Mac and Fannie Mae (i.e. $484,350). Although jumbo loans tend to have stricter approval requirements than conventional loans or USDA-RA loans - such as a higher down payment - they can be worthwhile because jumbo loans offer flexibility, with monthly adjustable-rate mortgage payments or fixed-rate mortgage payments. All that being said, since the underwriting standards for jumbo loans are more stringent than conventional loans, you may wonder whether the same standard applies to refinance a jumbo.
Reasons Not to Refinance
There are a few situations where you might want to reconsider refinancing.
Moving? If you are considering moving soon, you will want to figure out your break-even point to ensure you won’t lose money in the refinancing. (We talk more about this later on.)
Prepayment penalty. You’ll want to check if your mortgage has a penalty for prepayment. Confer with an RMS loan officer to look at the details and if it is worth it to refinance.
Existing home equity loan. If you have a home equity line of credit, you may need permission from your current lender to refinance.
More Tips About Refinancing
Calculate your break-even point. As with any investment, figure out how long it would take for your refinance to pay for itself. Take your total costs and divide by your monthly savings. That calculation will tell you how long it will take to reap the rewards.
Consider all the fees. Be aware of all the costs associated and if you can afford them. Some of the fees that you may have to pay are, but not limited to, appraisal fee, origination fee, and a mortgage application.
Consider the term of your loan. Once you figure out your breaking point, compare your total costs, including interest, of your current mortgage and what your new loan would be. In the early years you are paying more interest than principle. Once you refinance, you are starting over. If you are in the later years of your mortgage, it might not be worth it. Contact an RMS loan officer to help you with the best home financing options.
Is it worth the effort? Refinancing is just as much work as an initial mortgage. You will need to collect paperwork, evaluate your savings and options to decide if refinancing is for you.
Check your credit. Your credit may affect your interest rate, so be sure to know what makes up your score.
Some of the things your lender will look at are your income, your loan-to-value ratio, credit history and FICO® score. Much of the material you'll need is similar to what's required in order to pre-qualify. Give RMS a call for more news and information on refinancing and whether you're in a situation that makes you an ideal candidate.
*This article was originally posted 02/1/2019. The rates and figures have been updated to reflect data as of June 2021.