Should I Refinance?

With recent lower interest rates, many homeowners are wondering if they should refinance. By definition, refinancing a mortgage means paying off your existing mortgage and replacing it with a new one with a lower interest rate or term. Before you start the refinancing process, you should determine whether you will be assessed any prepayment penalty for paying off your existing mortgage early. The fee could be several months’ worth of mortgage payments. Also, most banks and lenders require that lenders maintain their original mortgage for at least 12 months before they are able to refinance.

There are many reasons to refinance, but the more popular ones are as follows:

1.) Lower Your Interest Rate and Repayment: This is the most popular reason. If you have a 5% interest rate or higher, it may be worth seeing if you can take advantage of the lower interest rates, currently below 4%, to reduce your monthly payment and overall cost of the loan. Some even choose to buy points to lower their rate. This means paying an upfront fee in exchange for a lower monthly rate. A lower rate translates to lower payments.

2.) Shorten the Term of Your Loan: If you have a 30-year fixed mortgage, it may be advantageous to change to a 15 or 20 year loan to pay off your mortgage sooner. This means that you’ll own your home free and clear that much sooner. The only downside is that you’ll have to pay more towards your payments each month.

3.) Cash-out Refinance: With home prices increasing, you might have enough equity to cash out and invest in something else such as a vacation home or new business opportunity.

4.) Change the Type of Mortgage That You Have:  It may be advisable to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. Refinancing to a fixed-rate loan can provide stability in your monthly expenses allowing you to budget more easily.

When you buy a home, you will have to pay certain closing costs to complete the sale. When you’re refinancing, you’re essentially replacing your original mortgage loan with a new one which means you have to pay closing costs again.  The closing costs for a refinance cover a wide range of fees and could easily total thousands of dollars. When considering whether refinancing is something that you should do, you need to calculate your break even point which is the total cost to refinance divided by the amount that you expect to save each month by refinancing. For instance, if your cost is $10K and your monthly savings are $244, you will need to continue owning your home for 40 months before seeing any real savings. If you plan to stay in the home for more than 3 years, then refinancing could be a viable option for you. However, if you are planning to move to another home in the near future thereby not being able to benefit from the savings after 3 years, a refinance would not make sense.

So how much is it going to cost to refinance?  The rough estimate of closing costs to refinance will run between 2%-4% of the loan amount. Generally, you can expect to pay the following closing costs;

1.) Application Fee: Lenders impose this fee to cover the cost to run security/credit checks of the borrower and to process the loan.

2.) Title Insurance and Title Search: Covers the cost of the policy which is usually issued by the title insurance company and insures the policy holder for a specific amount. It also covers the cost to review the public records to verify ownership of the property.

3.) Settlement Fees: The title company or attorney who conducts the closing will charge fees to the borrower for preparing the documents and conducting the closing.

4.) Points and Fees: Lenders may charge an origination fee for their work in preparing and evaluating a mortgage loan.  Points are prepaid financial fees which are imposed by the lender at closing.

You may see lenders offering a “no-cost” refinance loan which is when the lender pays the closing costs for the borrower. However, be aware that the lender generally tries to make up this money from other aspects of the mortgage such as a slightly higher interest rate.

Once you decide to refinance, there are a few steps that you should take as part of your due diligence:

1.) Get your credit score as it will partially determine the rate that you are able to get.

2.) Determine your home’s current value.

3.) Research mortgage rates and start to pull together the documentation that the lender will require such as past bank statement, proof of employment and salary.

In many cases, it makes the most sense to refinance with the original lender. By so doing, lenders may not require a title search, property appraisal thereby saving on costs. Additionally, in most cases, lenders will offer a better rate by staying with the original lender.

Hope you have found this short blog to be of value as you determine whether refinancing is right for you. Should you have any questions or are in the market for residential real estate in South Florida and not currently working with a real estate agent, please do not hesitate to contact me at (954) 547-9483 or email at jkenney10f@gmail.com. Thanks

 

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