Is Refinancing Your Mortgage a Viable Option?
By: Cathy A. Norris CFP®, CLTC, CRPC®, Financial Advisor
Mortgage rates have dropped to historically low levels in recent months. If you already have a mortgage and wonder if you could benefit by refinancing your home loan, it may be worth a closer look. But refinancing is a complex process, one that can be costly, as well. You want to be sure that refinancing is right for your circumstances.
The first consideration is whether the terms of a refinanced mortgage are significantly more favorable to you than those on your existing loan. This might be obvious if you are working with an adjustable rate mortgage where the rate has risen significantly from the time the mortgage originated. Even the rate on a fixed rate loans (typically 15-year or 30-year loans) might be notably higher than what you could find in the market today.
Refinancing is a more critical consideration if you’re having difficulty making payments on your current loan and face the potential of a home foreclosure. In that instance, you should actively seek to refinance your mortgage with a new mortgage provider or talk to your current lender about restructuring your loan.
The big question – is it worthwhile?
Refinancing a mortgage usually comes down to one simple question – is it financially beneficial for you to do so? This requires a few pieces of information, and you must weigh both the immediate and long-term benefits:
1. What is the new rate that is offered?
You will want to shop around and see what different interest rates and loan terms lenders have to offer. Once you have found a rate that looks attractive, calculate how much you would save in your monthly payment by refinancing at the lower rate. You can find mortgage calculators and refinancing calculators on the Internet, so you can compare your current house payment (principal and interest) to what the payment would be if you refinanced.
2. What are the costs of refinancing?
There are costs associated with a typical mortgage refinancing. These can include:
• Application fee – to cover the initial costs of processing your application
• Title search and title insurance – a legal requirement to verify ownership of the property
• Appraisal fees – to pay for a new appraisal of the property’s value
• Loan origination fees – these typically run about 1 percent or more of the total value of the loan.
Costs can run up to several thousand dollars. In some cases, lenders may waive certain fees, but often when this occurs, the interest rate on the loan is higher.
3. How long will you be in the house?
After you determine how much you would save on a monthly payment and how much it will cost you to refinance your mortgage, you will be able to calculate how many months and years it will take for you to come out ahead by refinancing your mortgage. For example, if the monthly payment declines by $100 and the cost of obtaining the loan was $3,000, it would take 30 months ($3,000/$100 monthly payment) to “break even” on the loan. In this case, staying in the house three years or longer would make it worthwhile to refinance. If you think you may move before that time, it might not be beneficial.
4. Are you in a position to refinance your home?
One of the first issues, due to the decline in housing values over the last two years, is whether the loan you seek is reasonable, given the current market value of your home. A number of homeowners, particularly those who made a purchase with little money down before the housing market collapsed, are finding that that they owe more on their house than its current market value. In that case, shopping around for a refinancing deal is probably not a realistic option, as you could not obtain a mortgage for more than the property is worth. Alternatively, you may want to talk to your current lender about the possibility of restructuring your loan (keep in mind that they have no obligation to do this).
Another issue is whether you will qualify for a loan or be able to obtain the most favorable interest rate. If you have had problems with missed payments or other credit issues in the past, or you recently suffered a job loss, it may be more difficult to obtain a new mortgage.
The primary appeal of refinancing is to reduce your monthly payment and improve your household’s cash flow. A financial planner can help you determine your financial picture and cost-saving techniques.
Cathy A. Norris is a Certified Financial Planner™ in Oldsmar, FL Contact: 813-814-2935 or firstname.lastname@example.org
This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.
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