By Paul M.J. Suchecki  Tue Feb 4, 2014

When It’s Time to Refinance, What Resources Should You Use?

When it’s time to refinance what resources should you use by Chelle

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Since January 1st, the Dow Jones Industrial Average has lost 5.3 percent of its value.

When economic news is disappointing, mortgage interest rates fall as well. As of this writing, qualified borrowers can get 4.31 percent interest on a 30-year mortgage down from 4.38 the week before.

It’s a great time to refinance your home loan. What resources can you use to guide you through the process?

Is it time to refinance?

Here’s the basic checklist:

  • Is your current interest rate at least 1.5 percent higher than what you can get today? Remember, because better rates are available does not mean you qualify.  Today’s 4.31 percent interest rate is for borrowers with FICO scores over 740. What is yours? Is it better than when you applied for the mortgage you now have?
  • Remember that there are multiple closing costs to consider. No-cost refinancing is not free. The fees are simply added to the principal balance of your new mortgage.
  • How long do you plan to stay in your home? To see if a refinance is worth it, divide the total cost of refinancing by the amount you’ll save on your monthly mortgage payment. That number will tell you how many months you need to stay to break even. If you plan to live there longer, refinancing is probably worth it.
  • If you have had an interest-only adjustable rate mortgage (ARM) for the past five years and have to start paying down your principal in the very near future, refinancing into a 30-year fixed rate mortgage would probably lower your payments—although it would extend the life of your loan. Unearth your paperwork and do the math. Your ARM payments are calculated by a benchmark rate, often the London Interbank Offering Rate (LIBOR) added to a margin (the bank’s profit) which is often around 2.5 percent. Determine your rate, take your principal, plug it into a refinancing calculator and see what your payment will become.
  • Rates on a 15-year fixed mortgage are nearly a full point lower than for a 30, today at 3.36 percent.  See if it’s worth refinancing from a 30-year fixed rate home loan to a 15-year loan.
  • Do you need to take cash out of your home, for a child’s college education or to pay off a car loan? With cash-out refinancing, you refinance your mortgage for more than what you owe on your principal, then use the extra cash elsewhere. If, for example, you’re an employee and took out a car loan to get to work, you can’t deduct any car expenses. If you pay off your car loan with cash-out refinancing, not only does your interest rate drop, the interest becomes tax deductible.
  • Are you ready to stop paying private mortgage insurance (PMI)? If you financed your home with less than 20 percent down, you most likely got private mortgage insurance. As part of a refinance, you’ll get your home appraised. Have the home values in your neighborhood appreciated lately? If you bought a home in Detroit in 2009, your home has lost value since, but if you bought in nearby Ferndale, homes there have appreciated more than 27 percent this past year alone. If your new mortgage is for less than 80 percent of your home’s appraised value, you can stop paying PMI. Zillow.com is a good resource to see how much your home is now worth.
  • Are you at the beginning or end of your mortgage? At 7 percent on a 30-year loan after about 20 years, you’ve already started to pay down more principal than interest every month, so rather than pay for a new round of closing costs, it could make more sense to simply send in more principal with your payments every month, as long as you don’t have a pre-payment penalty.

Remember to use MyBankTracker.com for more insights on refinancing your mortgage. Ultimately, refinancing is a complicated decision. Before you make it, talk to your accountant or turn to one of the U.S. Department of Housing and Urban Development (HUD) approved low-cost counselors for advice.

Find the best mortgage refinance rates.

 

Related Stories:

Should You Refinance to a 15-Year Mortgage?

Is 4 Percent the New Normal Mortgage Rate?

Understanding Closing Costs on a Home Purchase

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