Questions to Ask Before Deciding to Refinance Your Mortgage

With the mortgage market the way it has been lately, have you been thinking about refinancing? Before you make an appointment with your lender, take the time to ask yourself the following five questions. This will help you decide if refinancing is a good idea or if it might turn into a financial problem down the road.

Why do you want to refinance?

Many borrowers contemplate refinancing to extend their loan for another 30 years to reduce their monthly mortgage payment. Another group who might want to refinance are those who bought their homes under an adjustable rate mortgage (ARM). These mortgage loans have an initial period of a fixed interest rate and then a floating rate that changes based on market conditions, so it’s sometimes best to refinance before that initial rate is set to fluctuate in an effort to manage the monthly mortgage bill. By refinancing, an ARM borrower will be able to either change to a fixed rate mortgage or extend their initial fixed rate.

How will you know if this is the right choice for you? Ask yourself if the benefit of a lower interest rate mortgage and possible lower monthly payments will be worth the cost after closing fees are added in. Closing costs can sometimes be upwards of 2% of the total loan amount, so you’ll need to do some math and figure out how long it might take you to pay that back and if refinancing is worth it.

How long will you stay in the house?

If you might be moving within the next few years, it most likely won’t make sense financially to refinance. Here’s an example: You’d like to refinance your $250,000 mortgage and you’ll pay 2% in closing costs. That’s $5,000 you have to make up so that the refinance process worth the effort. If your monthly mortgage payment is only reduced by $200, it would take you two years to make up the closing costs alone – and that’s not even factoring in that the mortgage has been extended out another 30 years.

If you plan to stay in your current home for years to come, then refinancing would most likely make sense over the long run. If you don’t think you will be in your current home in the next couple years, it might be best to hold off on refinancing for now.

How much equity do you have in your home?

If you still owe more than 80% of your home’s value, refinancing probably won’t make financial sense for you. If you currently have home equity loans, you will also need to pay them down before you look into refinancing. Otherwise, your rate and payment will be affected and most likely won’t be as low as it could possibly be – which would defeat the purpose of refinancing.

On the other hand, it’s a smart idea to refinance if you put less than 20% down when you bought the home and you now qualify to take out a mortgage with 20% or more in home equity built up. This would happen as you pay down the mortgage over the years, or due to home appreciation. When you have 20% or more in home equity, you will also eliminate your private mortgage insurance (PMI) payment. Refinancing with enough home equity can eliminate this monthly fee altogether!

How is your credit score?

If your credit score decreased since your original mortgage, refinancing would not be a good idea. A dip in credit will affect the rate you will qualify for or you may not even qualify at all. If your credit score isn’t the greatest, wait to build it back up before applying to refinance your mortgage.

Are you trying to get out of debt?

For those facing large credit card debt or medical bills, refinancing with a cash-out option (where you borrow more than the amount of your mortgage and take the extra in cash), may seem like a great idea. Technically, you can use the lower interest rate funds from the refinance to pay off your higher rate interest bills, and pay off your debt.

However, this usually only works for those who are disciplined, have adequate income to continue to pay off the debt, and fell on hard times temporarily. Even if you don’t run up your credit cards ever again, you are potentially spreading this new obligation to 30 years by adding it onto your new mortgage. You might have a smaller monthly payment, but if it takes you the full 30 years to pay off the refinanced mortgage – you’ll owe 30 years of interest built in as well. This is definitely something to consider and you’ll want to really do your research before you consider the cash-out refinance option.

In the end, not everyone will benefit from refinancing their mortgage. If you are considering it, be sure to answer the five questions above to know if refinancing is the right financial step for you. Questions about refinancing? Contact the Loan Department at First Financial, and we’ll help you decide between your options with personalized service.*

*APR = Annual Percentage Rate. Subject to credit approval. Credit worthiness determines your APR. Rates quoted assume excellent borrower credit history and are for qualified borrowers. Your actual APR may vary based on your state of residence, approved loan amount, applicable discounts and your credit history. Higher rates may apply depending on terms of loan and credit worthiness. Available on primary residence only. The Interest Rates, Annual Percentage Rate (APR), and fees are based on current market rates, are for informational purposes only, are subject to change without notice and may be adjusted based on several factors including, but not limited to, property location, loan amount, loan type, occupancy, property type, loan to value, debt to income ratios, FICO credit scores, refinance with cash out and other variables. Mortgage insurance may be required depending on loan guidelines. This is not a credit decision or a commitment to lend. If mortgage insurance is required, the mortgage insurance premium could increase the APR and the monthly mortgage payment. See Credit Union for details. A First Financial membership is required to obtain a mortgage and is open to anyone who lives, works, worships, or attends school in Monmouth or Ocean Counties. 

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