...Refinance my home?
My youngest son recently purchased a home in a neighboring State. He and Sarah are both very excited with the purchase and the home as they thought it may have taken quite a while before they could purchase. BUT, as life has a habit of doing, circumstances changed suddenly and they were now able to purchase. They paid a bit higher interest rate and have been working to raise their credit scores so it's over 700. They heard on the news that rates may be going down and they asked, "Dad should we refinance now?" "That's a good question", says I and we spoke about refinancing. I also shared this article the folks at KCM put together.
Should I Refinance My Home?
With the recent lower interest rates, many homeowners are wondering if they should refinance.
To decide if refinancing is the best option for your family, start by asking yourself these questions:
Why do you want to refinance?
There are many reasons to refinance, but here are three of the most common ones:
- Lower your interest rate and payment – This is the most popular reason. If you have a 5% interest rate or higher, it might be worth seeing if you can take advantage of the current lower interest rates, hovering below 4%, to reduce your monthly payment and overall cost of the loan.
- Shorten the term of your loan – If you have a 30-year loan, it may be advantageous to change it to a 15 or 20-year loan to pay off your mortgage sooner.
- Cash-out refinance – With home prices increasing, you might have enough equity to cash out and invest in something else, like your children’s education, a vacation home, or a new business.
Once you know why you might want to refinance, ask yourself the next question:
How much is it going to cost?
There are fees and closing costs involved in refinancing, and Lenders Network explains:
“If you were to refinance that loan into a new loan, total closing costs will run between 2%-4% of the loan amount.”
They also explain that there are options for no-cost refinance loans, but be on the lookout:
“A no-cost refinance loan is when the lender pays the closing costs for the borrower. However, you should be aware that the lender makes up this money from other aspects of the mortgage. Usually pay charging a slightly higher interest rate so they can make the money back.”
If you’re comfortable with the costs of refinancing, then ask yourself one more question:
Is it worth it?
To answer this one, we’ll use an example. Let’s assume you have a $200,000 home loan. A 4% refinance cost will be $10,000. If you want to lower your interest rate from 6% to 4%, then refinancing is going to save you $244 per month. To break even ($10,000/$244), you need to continue owning your home for over 40 months.
Now that you know how the math shakes out, think about how much longer you’d like to own your current home. If you plan to stay for more than 3 years, then maybe it is advantageous for you to refinance.
If, however, your current home does not fulfill your present needs, you might want to consider using your potential refinance costs for a down payment on a new move-up home. You will still get a lower interest rate than the one you have on your current house, and with the equity you’ve already built, you can finally purchase the home of your dreams.
Bottom Line
There are many opportunities for growth in the current real estate market. To find out what’s right for your family, meet with a local real estate professional who can help you understand your options and guide you toward the best decision.
Refinancing can be good for a number of reasons. Pam & I used refinancing to lower our rate since we started at 13%. We also refinanced and took out some equity to make significant repairs and upgrades to the property. All in all, through refinancing and making extra payments, when we had the cash, we paid our 30-year mortgage off in 23 years.
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