In the current low interest rate environment, you’ve probably heard that now is the best time to refinance your home loan — but how can you know if refinancing is right for your personal situation? Choosing to refinance depends on many factors, such as interest rates, closing costs and the length you plan to stay in your home.
If you’re considering refinancing, start by asking yourself four questions to evaluate if mortgage refinancing is the best option for your situation.
1. Can I afford the costs of refinancing?
Refinancing can involve many of the costs from your first mortgage, such as appraisal fees and title and escrow costs. If these expenses outweigh the potential savings from a lower monthly payment, a refinance may not be the right decision. When choosing to refinance, it’s helpful to calculate the break-even point, which is when the costs of refinancing have been covered by your monthly savings.
For example, if your refinance costs $4,800 and you are saving $100 per month compared to your previous loan, it will take 48 months to recoup your costs. Under this scenario, if you plan to move or sell your home in less than four years, refinancing may not be worthwhile
2. Do I have enough appraised value in my home?
The appraised value of your home is an important qualification for refinancing. If your home’s appraised value is too low, it will be difficult to qualify for refinancing. In the current market, many Idahoans are benefiting from appreciated home values, but it’s still important to have realistic expectations.
After your home is appraised, a lender may calculate your loan-to-value ratio and the interest rates you qualify for. If you don’t have an optimal loan-to-value ratio, you may want to increase your equity before refinancing.
3. What type of new mortgage would best serve my financial goals?
If you choose to refinance, you may not benefit by simply getting a fresher version of your original mortgage. Consider your goals to determine which mortgage product is the best fit for your needs. For example, switching to a 15-year mortgage might create higher payments, but will also likely pay off your home more quickly with less total interest paid.
It’s important to consider all your options and recognize that picking the lowest rate available may not be the best fit. Every loan program provides different rates, which sometimes require additional fees called “points” to “buy down” the rate. Conversely, there are also higher rates that include a “rebate” that can help pay closing costs, such as origination and title fees. It’s important to meet with a mortgage professional who can help evaluate your options and identify a loan that best meets your needs.
4. Can refinancing help consolidate my debt?
If you carry non-mortgage debt, you may benefit from something called a cash-out refinance. This is when you refinance a current mortgage with an amount greater than the existing loan, which will give you the difference between the two loans in cash.
If you carry high-interest debt, such as credit card debt, it can be tempting to use equity to pay off those liabilities. However, depending on the terms and interest rate of a cash-out refinance, a home equity loan or home equity line of credit is sometimes a better fit, particularly concerning the total costs of the transaction. Make sure to speak with a mortgage professional if you’re considering a cash-out refinance.
Overall, the refinancing option you choose should be one that meets your budget and long-term financial goals. If you’d like to take advantage of the current low interest rate environment, it’s important to speak with a mortgage professional and discuss your individual needs.
Ross Farr is a mortgage loan officer for Zions Bank in Eastern Idaho and can be reached at 208-932-2256 or Ross.Farr@zionsbank.com.