This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.
Q: Joe, I have been reading about low mortgage rates. How can I know whether I should refinance my mortgage?
A: Because interest rates are down, this is a great time to consider refinancing. You will need very good credit to get the best rates when you are refinancing second mortgages or just a normal house mortgage, but it is worth checking on.
Switching from Adjustable-Rate to Fixed-Rate Mortgage
When you originally took on your mortgage loan, those low rates might have enticed you to choose an adjustable-rate mortgage. The longer you have your adjustable-rate mortgage, the higher those rates can creep up.
Maybe now is a good time to refinance your adjustable-rate mortgage into a fixed-rate option.
So how do you know if it is right for you?
You will be spending money up front for the loan, but you will be saving money each month because your interest rate will be lower. Therefore, you will need to calculate how many months it will take to recoup your upfront cost. If you are going to live in the house at least that long, you should refinance.
Mortgage Payment
If, for example, your current mortgage is 8% on a $100,000 loan to be paid in 10 years, your monthly payment is $1213. If you can get that 8% lowered to 6%, your payment will drop by $103 each month. So far, so good.
What are your upfront costs?
The lender tells you that you will be paying one point and $2,500 closing costs. The one point is one percent of the loan amount, or $1,000. Added to the $2,500 closing cost, your upfront costs total $3,500. Divide your monthly savings into the upfront costs to learn how long it will take to break even. In this case, $3,500 divided by $103 equals 34, which means you will break even after 34 months.
This is great if you plan to stay in the house for more than 34 months; not great if you think you will be moving soon. If you stay the entire 10 years, you will save a total of $8,860.
If you decide to refinance your mortgage, make sure to look out for any additional fees the company may charge. Just about every company is going to have an application fee. This fee will cover the cost of checking the credit report and the paperwork you’ll have to go through. Ever lender company is different, and each of them is going to have varying application fees. Some companies charge ridiculous fees.
Additionally, you are going to run into some title insurance fees and lender’s attorney fees. Refinancing your mortgage is a long and complicated process, there are going to be several parties involved. Everyone who plays a part in getting your mortgage loan refinanced is going to want to be paid for their services.
Hint: Shop for your best deal.
Tell your prospective lenders you do not want to pay points or origination fee. With the current competition for these refinance loans, they may just listen. Now is a great time to refinance your home so go save yourself some money.
Refinancing Options
Not only should you compare dozens of different companies before you pick a lending company, you should also weigh all of the refinancing options before you pick one of the loans.
Adjustable-Rate Mortgage
I already mentioned some homeowners might want to refinance to go from an adjustable-rate to a fixed-rate, but you may want to refinance to go the other way. Depending on the interest rates and the value of your home, it may be a good idea to refinance your mortgage to switch to an adjustable-rate loan.
Fixed-Rate Mortgage
A fixed-rate mortgage is the most traditional type of loan out there. For the vast majority of homeowner’s, they are going to refinance their mortgage using a fixed-rate mortgage.
FHA
If your credit score is less than perfect, an FHA loan might be the best route for refinancing your house. With the FHA refinancing loan, you can refinance up to 96.5% of the current value of your home.
One of the disadvantages of the FHA loan is they going to require mortgage insurance premium. Also, they monthly insurance premium will not be eliminated until the end of the loan. Unless your credit score is lower than average, choosing a traditional refinance option will save you money.
VA Mortgage
Veteran Affairs loans (VA loans) have become a very popular option because you can refinance 100% of the house’s value and there is no mortgage insurance required.
As you can probably guess from the name, these loans are available to any applicant who is active duty military, a veteran, in the reserves, or a member of the national guard. If you’ve joined the military since you purchased your home or you didn’t have the advantage of a VA mortgage initially, it may be a good idea to consider switching to refinance to a VA mortgage.
What to Know Before You Refinance
Before you start the process of refinancing your home, there are a couple of key factors you should know to save you both time and frustration down the road. It can be a confusing decision trying to decipher if you should refinance and which kind of loan and company to choose, but looking at all of the information and help you solve the mystery.
The first thing to determine is your credit score. Your credit score is going to impact your rates and which kind of loan you may qualify for. It’s easy to see what your credit score is, and hopefully, it’s good. Anyone with a credit score of 740 or higher is going to get the best rates for their refinancing loan.
Another factor you should look at is your debt to income ratio. The lending company is going to want to make sure you’re going to be able to make the payments for your new loan. The lower your ratio, the better rates you can secure.
The next thing to look at is your home equity. The equity you have is your home is going to be one of the biggest factors when determining if you can get approved for your new loan.
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