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Depending on your financial situation and price difference with the current rates, now could be the right time to refinance your home. It’s smart to do the math from time to time throughout the lifetime of the loan to see if refinancing makes sense.
When you check the numbers, you will be looking at more than the current interest rates. You’ll also want to decide which type of mortgage loan you’d like to refinance into.
Plan to get loan estimates from three to five lenders. If all looks good the next step is to gather and submit all of the required financial documents and lock in your interest rate.
You probably have some questions around refinancing your home mortgage and this is a good time to schedule an appointment with your financial advisor and/or lender. Use these top questions to start the conversation.
Consider the amount of time you intend to live in the home. If you see yourself owning this home for many years and long enough to recoup the closing costs, it makes sense to regularly review the numbers and refinance the loan. Chances are there are savings you can secure by qualifying for more competitive loan terms. If you’re planning to relocate in the next five years, refinancing now may not be as beneficial.
By reviewing the cost to obtain a new mortgage, you’ll know how well this action fits into your current plans and budget. You may be surprised to learn of potential savings based off the balance left on the current loan.
The size of the after-tax monthly savings could be enough reason to move forward.
If you can lower your interest rate by half to three-quarters of a percentage point, this will save on your monthly payments. The higher the percentage point, the more savings!
If 20% or more of the mortgage loan has already been repaid in full, you may be eligible to get out of paying for PMI (private mortgage insurance) based on the increased value of your home.
Having a lower interest rate can lower the payment even if the length of the loan converts from a 30-year loan to a 15-year loan. When you speak with your financial advisor, ask for a comparison between an adjustable rate mortgage with a fixed rate for the same monthly payment amount.
Refinancing can additionally aid you in accessing equity in your home or to get rid of a loan backed by the FHA (Federal Housing Administration).
Yes, you can typically expect to pay between 2%-6% of the loan amount in closing costs. There will be additional expenses and costs associated with taking out a new loan, e.g. origination fee, appraisal fee, title insurance fee, a credit report fee and attorney fees. If you're struggling to make your monthly mortgage payments, you can refinance to get longer loan terms, which could equal a smaller monthly payment. However, the loan over the long term will be more costly since you're paying interest for a longer period of time.
It's wise to calculate your break-even point to determine if the closing costs associated with refinancing will work for you. You can calculate this number by dividing your closing cost by the monthly savings from your new payment. As a guide, 20-50 months may work best but 75 months could be too long.
The minimum amount of time could be as little as six months or as long as two years before you are eligible to refinance. This time period will depend on the original loan terms and the type of refinancing you're seeking.
Yes, lenders will consider the current interest rates and your credit score. The best conventional mortgage rates and terms are available for those with a credit score of at least 620. A check of your credit report will determine your score.
Speaking of credit scores, should your financial circumstances change and your credit score improves significantly, it may be worth refinancing. Improved credit scores from paying down debt may qualify you for a lower interest rate.
Something to remember about credit score and large purchases, refinancing triggers a credit check known as a hard inquiry. This type of inquiry will cause a slight dip in your credit scores and will notice a small decline in the scores after you accept the loan. If you are planning to make a large expense such as a car loan, personal loan, educational school loans, you may want to hold off on these sizable expenses until after the home mortgage refinancing, your credit score will show higher.
Refinance loans are treated like other mortgage loans when it comes to your taxes. You may be able to deduct certain costs such as the mortgage interest but only if you itemize your deductions. If you usually take the standard deduction, the refinancing won’t have a noticeable impact on your taxes. For those choosing a cash-out refinance, the IRS views the cash from your cash-out refinance as a loan rather than taxable income. Unless you've spent the funds on home improvements that have added value to your home, you will not be able to deduct the interest on the extra sum of the money you borrowed. As always, discuss these questions with your tax preparer.
Since 2004 Sara Lyn Nguyen continues to bring a wealth of knowledge and expertise about buying and selling real estate around the Houston area to those she serves. Sara is a multi-year award winning REALTOR® and relocation specialist where her clients trust her to have up-to-date information on the real estate market. She has been one of Gary Greene’s Multi-Million Dollar Top Producers, and citywide was the #2 Top Producing agent in 2020, #3 in 2021, and #2 in 2022. When it’s time to buy, sell, invest, or relocate speak with a trusted professional knowledgeable in the homes and neighborhoods of Fort Bend/Sugar Land and the surrounding region.
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