Article provided by Nerdwallet.com
What You Should Know About Mortgage Refinancing
The mortgage payment is the largest monthly expense for many homeowners, so what could be more tempting than the prospect of trimming yours, particularly when interest rates are as low as they are?
That means looking into refinancing your mortgage. Here are some things to think about when you do.
How much will it cost upfront to save?
The interest rate on the new mortgage would be lower, sure, but add up what it will cost you to refinance. There’s the credit check, an appraisal, origination fees and closing costs. And your current mortgage servicer might charge you a penalty for paying off your old mortgage early. Once you know what new rate you qualify for, you can calculate your new monthly payment and learn how much you might save.
Another question: Have you built up equity — the difference between your home’s market value and how much you owe? This matters because if you have less than 20% equity, you might have to pay insurance on the new mortgage to protect the lender if you default. This is another potential cost to include in your calculations.
After adding up the costs of refinancing, compare the new monthly payment with what you pay now.
When you’re looking for new terms, shop around. You’re more likely to find lower mortgage interest rates at a not-for-profit credit union like Community First than at a large, traditional bank.
Will you stay long enough to save?
Closing costs on a mortgage refinance can run to around 5% of the loan amount. You need to think about how long it will take for your new monthly savings to exceed those costs — that is, how long you will need stay in your current home to realize true savings.
If there’s a chance you won’t stay long enough to at least break even — because you plan to start a family and will need to move to a bigger house, for example — refinancing might not be wise. And if you are already 10 years or more into your current mortgage, refinancing can mean you go from paying down the principal on the loan back to paying down interest, since mortgage interest costs tend to be front-loaded.
Has your credit improved?
Your credit scores tell lenders how good a risk you are as a borrower and play a part in what sort of new interest rate you qualify for. If your score has improved since you took out your first mortgage, you’re in good shape.
Credit scores are built largely on credit reports. If you haven’t checked yours lately, take advantage of the law that entitles you to a free copy every 12 months from each of the three major credit agencies.
Will rates stay low?
Mortgage rates, like short-term interest rates, are at historic lows right now. While they may rise in the coming months, it’s not likely to be by enough to take refinancing off the table.
Refinancing may seem like a great option — and sometimes it is. But before you dive in, make sure you understand the consequences and are confident the timing is right.
Peter Lewis, NerdWallet
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