Mortgage rates have recently dropped dramatically, prompting homeowners to refinance their mortgage loans. For some borrowers refinancing may make sense, but for others it could actually work against them. So how do you decide?
Contacting your mortgage representative to review your personal situation is always a wise decision, but in the meantime here’s a quick reference to help you determine if refinancing may be the best option for you:
Refinancing your mortgage may unlock the equity in your home.
Because you’ve been building up equity in your home, you may be able to tap that equity to pay off high-interest credit cards or other bills. So instead of carrying large credit card balances or taking out a personal loan, refinancing your mortgage may actually help you reduce debt.
However, if you’re planning to sell your home within the next year or so you may not recoup the cost of obtaining a new loan, so refinancing probably isn’t the best option in this case. Most mortgage companies treat refinancing as a new transaction, which means closing costs, discount points and other fees. And if you’re taking equity out of your home and you borrow more than 80% of the home’s current value, you will be required to pay for private mortgage insurance, tacking approximately $100 or more onto your payment each month.
Favorable interest rates may lower your monthly mortgage payments.
Refinancing to a lower rate or from an adjustable rate mortgage to a stable fixed rate mortgage could slash hundreds of dollars from your payment each month. The rule of thumb states that if you can cut your rate by at least two percent than refinancing generally makes sense. Of course, you’d have to do the math to see how long it would take you to recoup the expense of refinancing.
On the other hand, people with credit scores less than 475 have a slim chance of lowering their rate so refinancing would not be an option. Additionally homeowners refinancing from a fixed rate to an adjustable rate run the risk of their payments increasing should rates rise. This is especially true for couples close to retirement. They are risking the possibility that rates could go up just as they are ready to retire.