By Wanda Marie Thibodeaux
Refinancing involves taking out a new home mortgage to pay off your existing one. Knowing whether to wait or go ahead with this process can be tricky business, but asking yourself these key questions can help you make a final call.
Are there conditions on waiting in your contract?
Many individual lenders include conditions within mortgage contracts to discourage clients from paying off a mortgage faster, simply because the lender makes money as they collect interest. Most commonly, you must wait 12 months to refinance or face a prepayment penalty fee.
How much will your interest rate benefit?
A lower home mortgage interest rate saves you money, helps you build equity faster and can lower what you pay each month. With this in mind, an old-school rule of thumb is to wait to refinance until your interest rate can drop by 2%. Today, however, some professionals say a drop as little as 1% can be advantageous. The bottom line is just to make sure your interest rate gives you enough savings to accommodate closing and other fees, or alternately, the refinance lets you save by switching from one loan type to another (adjustable to fixed-rate or vise versa).
What’s the purpose behind the refinance?
In some cases, the reason behind a refinance can be urgent. You might need cash from the refinance to pay for repairs that can’t wait, for example. If this is true for you, it can make sense to move forward, even if you don’t end up saving very much.
How long do you plan to stay in the home?
If you don’t stay in your home very long after a refinance, the costs associated with getting the new mortgage might outweigh what you’d gain from a lower interest rate. Thus, you have to calculate when you’d “break even”. A basic formula that will give you a general idea of when refinancing might make sense is to divide the total closing cost by your monthly savings. If you’re going to move before the month-based break-even point this calculation gives you, it’s probably better to stick with your current mortgage.
What’s your credit like?
Depending on if you stick with your current lender to refinance, getting a new mortgage might mean a new inquiry into your credit, which can affect your credit score. If you anticipate your credit will get better in the future, you might want to wait to refinance to see if your improved credit score can get you a better rate. If you think it will worsen, take advantage of the good credit you currently have.
Whether it’s a good idea to refinance can be fairly complicated. Factors such as prepayment terms, your credit, moving plans, interest rates and the purpose behind the refinance all matter. If you’re still not sure what makes sense, consult a top mortgage company in Glendale, AZ for advice based on your unique circumstances.