With some hopeful economic indicators appearing on the near horizon, as well as the housing and construction markets showing a few positive signs of life, homeowners are evaluating their options on refinancing current mortgages due to current interest rates being at record-setting lows. Beyond the basic question of “should I ?”, is also the critical issues of either “when”, or “if” to be factored into the equation. Before any of these points are examined, there are a few criteria to ponder, given that there are a multitude of individual factors that weigh in on this decision. All have a significant and long-term financial impact upon the refinancing option on an existing home mortgage. To begin, here are a few things to determine:
- The current or existing interest rate and APR applied on the mortgage
- The type and term of the existing mortgage ( 30-year fixed, 5/1 ARM, etc. )
- The current mortgage having a pre-payment penalty charge
- The length of time, in number of years, planned on residing in the home
- The current home market value in comparison to the outstanding mortgage balance
- The interest rate available on a new mortgage based on current credit ratings
- The expenses associated with refinancing a new mortgage
Locating Your Key Mortgage Information
Most, if not all of the criteria listed above can be determined either by examining the relevant mortgage documents on file, or by checking with the lending institution or mortgage company that handled the transaction or loan process, including the mortgage balance remaining on the loan. On matters regarding the current home value, either seek the services of a private appraisal service, or wait until an appraisal is done during the loan application process. Another option is to review what comparable and recent home sales have been in the neighborhood, or request a market survey from a local realtor.
Probably the single most influential factor in determining both the chances of a loan refinancing approval, and the affordability of the loan, will be the credit scores and the subsequent current mortgage interest rate offered. Some internet research will reveal the current interest rates within the national and local markets, whether they be banks, credit unions or mortgage companies. These published rates will most certainly be the best mortgage rates, and not necessarily those a borrower will eventually qualify for.
Evaluating the Costs and Tallying the Numbers
Depending on the lending source and requirements, a borrower will obviously seek the most favorable terms and the lowest closing costs. The associated closing fees will be quite extensive, and will include those for the application process, appraisal, tax services, flood certification, credit reports, doc stamps, title and transfer fees, points, surveys, attorneys, recording fees, and much more. Many of these items, including the interest rate offered, can be detailed on a Good-Faith Estimate (GFE) provided by a lender of choice, and are not binding until the application process moves forward. Any pre-payment penalties need to be factored into the overall cost breakdown as well.
With these numbers well in hand, the next step is to determine if what is owed on the existing home is less than what it is currently worth. If a borrower is ‘underwater’, or owing more than the value of the home, then qualifying for refinancing will be slim without putting substantial funds on the bargaining table, which may negate the whole process. In addition, an interest rate comparison is needed to assess further progress advantages. It is generally felt that unless the rate offered is at least 1% lower than the existing APR, then the ‘cost’ of refinancing is less than worthwhile.
Short-Term Savings versus Long-Term Benefits
Another factor is the length of time a borrower decides to stay in the home – too short, and the costs of the refinancing expense will not be recovered. Conversely, if the current mortgage rate is adjustable on the existing loan, say at presently 4%, it could conceivably rise to a level during the remaining term of the mortgage, to say 9%, which makes refinancing with a fixed-rate loan that much more affordable, even with the identical interest rate applied. Another option is to investigate shorter loan terms, alternate loan types, or base the refinancing decision on monthly payment affordability.
One final note on the monthly payment side of things; if the goal is to merely lower the monthly payments, then refinancing with a lower interest rate will certainly accomplish that. However, if a borrower is ten years into a thirty year mortgage, and decides to refinance into a new thirty year commitment, even with a lower interest rate, the downside is the interest paid out over the additional ten years. In the end, the quickest and most informative method to determine if “should I ?” is the right course, is to grab hold of a mortgage calculator, create a few ‘scenarios’, crunch the numbers, and see how the refinancing pros and cons play out before coming to a conclusion. It is certainly a far better method than simply rolling the dice, or flipping a coin.