Deciding when is the best time to pull the trigger on a home loan refinance, as a rule of thumb, is not always clear. Refinancing seems like a new opportunity to get a better interest rate or perhaps even to take funds out of equity to use for your own benefit. The problem is, though, that refinancing can be costly in some situations. It is a good idea to know when to refinance and when it can cause you to end up spending more on your mortgage, rather than less.
What are good rules of thumb to refinancing? According to some experts, the following tips can help you to save money on refinancing. To learn when to refinance, consider the following:
How much is the new interest rate going to be? Most experts warn not to refinance unless the new rate will be at least one to two percent lower than what you are paying right now. Anything less than that and you may not end up saving as much (considering you have to pay closing costs on the new loan). You must be able to compare the actual payment amounts if you want to accurately estimate if it’s a good idea to refinance. I do not fully agree with this as each situation is case by case. Sometimes 2% is not enough and sometimes .5% is a good refinances. It all depends.
Take your current loan product into consideration. The type of current loan you have might make a huge difference. For instance, if you have an ARM that’s at 5% currently, and can refinance into a fixed rate at 4%, this doesn’t make the 2% rule of thumb. However the long term security of a fixed rate may be awfully attractive. Things like mortgage insurance, loan terms and pre-payment penalties should all factor into the decision. Other exceptions apply.
Are you planning to remain in the home at least five years? If not, then refinancing may not help you to save any money. To save money on a refinance, you must stay in your house longer than the break-even period – the period over which the interest savings just cover the refinance costs. But again, call me because sometimes we have options where we can absorb costs because your break even must be within 6 months or 12 months or immediate, whatever the case may be.
How much equity do you have in your home? If you plan to withdraw that equity, or some of it, to consolidate debt or to do home improvement projects, plan to have at least 20 percent in place. Some lenders will not allow you to borrow up to 100 percent of your home’s value, either. Some programs allow 85% while some max out at 75%.
Do you have good credit? You may not qualify for a lower interest rate loan or save money overall if you do not have good credit. The better your credit is, the less you will pay to get a loan. If you have bad credit, it is likely that refinancing will be more difficult and will cost you.
Know your goal. Do you want a lower monthly payment? If so, you may pay more in the long term. Do you want to pay off your loan sooner? Try reducing the term and getting a lower interest rate, too. Ensure that you can accomplish your goal.
Don’t be afraid to ask for qualified advice
The fact is if you cannot save money, then it probably doesn’t make sense to refinance. Otherwise, it may cost you more in the long term and not make any sense for you to pay the closing costs on a new loan.
The rules of thumb are great for weighing the pros and cons – but remember, they are just guidelines. You should never make a decision as important as whether or not to mortgage your home based on general ideas, and that’s why we recommend taking the time to sit down with your favorite loan officer and get the facts. And in this situation, it’s important to be cautious with advice from friends and family members as it’s just that – free advice.