People refinance home loans for many reasons. Some homeowners want to reduce payments or acquire a lower interest rate. Others refinance for debt consolidation or to fund major home renovations. Whatever your reason, today's low mortgage rates make refinancing a viable option.
Weigh the cost of refinancing to determine whether a new mortgage will ultimately save you money. If you plan to move in a year or two, the cost of refinancing your home loan may not make it worth the expense.
Should you refinance?
Reducing the interest rate by a single point can make your payment more affordable. To quickly figure out the difference, note the savings between your current mortgage payment and the proposed new payment. Ask for a basic closing cost figure from the bank. Divide the closing costs by the savings between the two payment amounts. The resulting figure indicates the number of months required to break even to cover refinancing expenses.
What makes refinance worth it?
It depends on the homeowner. For some people, saving $150 per month is imperative. For others, $300 or more makes the expense worth it. Remember that many lenders include closing costs in the new loan to limit upfront expenses to customers.
Primary Mortgage Insurance (PMI)
Lenders require individuals to place a 20 percent down payment on the home. A down payment of less than 20 percent requires the homeowner to carry PMI. As you make monthly payments, you chip away at the mortgage principal. Over time, homeowners build up enough equity to eliminate the need for PMI. Address the issue of PMI during any refinancing discussions with your lender.
Where to refinance
Call your current mortgage company first to check refinancing options. Don't blindly assume they have the best rate. Investigate interest rates through the Internet and other banks. Some banks offer very low rates and extremely high closing costs. The flip side also features banks with no fees and a high interest rate. Check for loans that don't require the payment of points (one percent of mortgage value) to buy down the interest rate.
What are reasonable refinancing fees?
Basic mortgage fees include application costs ranging from $250 to $400. Home appraisal fees run from $300 to $500. A title search allows the mortgage company to determine your legal right to the property. Lender fees also include origination fees at one percent of the loan amount and attorney fees to cover the full loan process.
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