How to Determine if Refinancing Is Right for You

Interest rates are at record lows and now is the time to take advantage of these low rates. Many homeowners are considering refinancing their current mortgage. The rates are at all-time record lows but this does not mean that refinancing is the right thing to do for everyone.

When determining if refinancing is right for you, there are many factors to consider. This can be a confusing and daunting task for many homeowners. If you are considering refinancing, here are some things you should consider before starting the process.

Refinancing is the process of paying off your existing mortgage with the funds from a new mortgage. The majority of homeowners usually refinance to take advantage of a lower interest rate. This is not the only reason to refinance. Many homeowners refinance to change the terms of their loan, acquire cash to use for home improvements or to pay off debt, switch mortgage companies, or because their PMI (private mortgage insurance) requirement has ended.

Just like obtaining a mortgage, you need to shop around for the best lender. Once your lender is established, you will need to gather your documents and fill out the paperwork. During the process, there are many terms that you should become familiar with in order to make the right decision.

-An interest rate is the money you will pay to the lender for lending you the money. The lower the interest rate, the less money you have to pay to borrow.

-The annual percentage rate (APR) is the actual cost to borrow the money. This fee includes all charges by the lender to put the mortgage in place.

-Points are the fees paid to the lender that can lower your interest rate. The fees are optional and each point usually costs around 1% of the total mortgage amount.

-Closing is just like it says, closing the whole process up. It is the very last step in refinancing. At closing, all documents will be signed and finalized.

-Closing costs are the fees that are charged to the borrower to finalize the mortgage.

-Equity is the difference between what the home is currently worth to what you owe the lender. A great way to look at it is the equity is how much of the home you actually own. If your home is worth $300,000 but you only owe $175,000 to the lender, your equity is $125,000.

-If you’re looking to take money out of your mortgage then you will want to be familiar with cash-out refinance. This is when you would refinance for an amount higher than what you owe on your current mortgage.

– A fixed-rate mortgage is another term to be familiar with. This is a certain type of mortgage where your interest rate will not change. These mortgages are usually paid over a 15-year or 30-year term.

– An ARM, known as an adjustable-rate mortgage, is a mortgage where the original rate is set for a certain number of years and then it will start to fluctuate. A 3-1 ARM would be a 3-year fixed rate that can adjust after the three years every one year.

-Mentioned before PMI also known as private mortgage insurance is a fee tacked on when you put a downpayment of less than 20% of the purchase price. The PMI is added to your monthly payment and is non-refundable.

Once you are familiar with these terms it is time to work with some figures. A refinance calculator can help you determine if refinancing will help you save money. A refinance calculator can be found online. Input the current mortgage terms and the new refinanced terms to see how much money you will save over the life of your loan.

Just like with a new mortgage you will want to have a good credit score to refinance. The lower the score, the higher the interest rate. A score below 700 against a score above 700 can make a big difference. It could cost you or save you a half a percent. For example on a $190,000 30-year mortgage, a half a percent would be about $55 per month. Over 30 years that is around a $20,000 difference.

Having a bit of knowledge on the subject can definitely ensure you make the best decision. Once you have determined that refinancing is right for you, speak to a professional lender who can help you through the process.

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