We are right now in what is called a Refinance Market, because of the low interest rates. If you took out a mortgage more than a year ago, the odds are that your interest rate is now about 1% lower than when you took it out. A 1% percent difference in the interest rate is in my opinion when a Borrower should begin to inquire about refinancing if you are just looking to lower your monthly payments, but there are other things that you need to consider besides just the lower interest payment.
For example if they are refinancing because they need to take equity out of their property for improvements to the house, consolidate bills, or even for their kids college tuition, the decision of whether or not to refinance has fewer things to consider. The reason why I say that is that they have identified a need for additional money, and the main decision in my opinion is basically is this the best option to obtain those funds. In that situation the need is not to lower the interest rate, but to obtain additional funds and the interest rate is not as important as in the case of refinancing because you are looking to only lower your monthly payments. In my opinion the decision to refinance for the purpose of lowering your monthly payment is a tougher one then in the one for obtaining additional funds.
In both types of refinancing the Borrower needs to be aware of what the present value of their property is. If you are in a declining market, your property value could be less than when you purchased the property, or refinanced last. This is important because if you had a 20% equity in the house when you purchased or refinanced, you may now have to pay PMI if the value has dropped, and you may now have to add the additional cost of PMI to your payment. If you are looking to take out equity out of the property, this might not be as big a consideration, after all you are already expecting a higher monthly payment, because you are increasing the loan size. But if you are refinancing for the purpose of lowering your monthly payment, and now are adding PMI to it, you could actually increase your monthly payment in stead of decreasing it.
In the situation where you purchase a property and only made the minimal downpayment when you purchased the property, you will most likely not have enough equity in the property to refinance and/or cover the new closing costs. So if you still want to refinance in order to get the lower rate, it may actually cost you money out of your pocket in order to do so.
This leads me to my last point, the new closing costs. The closing costs on the refinance are going to be very similar to the closing costs when your first purchased the house. But unlike when you purchased the house, you need to now evaluate how long it is going to take you to make up these new closing costs based on the difference between the two monthly payments (existing and new monthly payment). This can be very easily done by dividing the Total Closing Costs by the difference in the monthly payments to arrive at the number of months it will take before you really start to see an actual savings in your monthly payment. In my opinion if it takes more than 36 months to break even, then you should really reconsider what you are doing.
This is a great time to refinance, but before making that decision Borrowers really need to first talk to a Loan Officer or Broker that they trust to fully consider the financial impact of what they are thinking of doing. As you have seen in the few of examples above, there is more to consider than just a lower interest rate, and a lot of consideration needs to be given before making a decision to refinance.
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Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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