A siren’s song seems to be calling to established home owners. It speaks to the inner financial gambler. It tempts with the allure of interest rates that continue to hover near bottom; rates which won’t last because they’re sure to rise dramatically next week, or next month, or next year; generous tax benefits for buyers who have been in their current homes long enough; and home prices that, while on the rise, are still a bargain compared to a decade go.
No doubt the market’s presenting good reasons to move or refinance now, but be honest with yourself. If you’re simply fixated on an opportunity presented by the current market and you wouldn’t otherwise be looking to move or refinance, physically or financially, it might be smarter to stand pat. Analyze what you really need and not what the market seems to be telling you to do.
Financial and real estate professionals pose some important questions for this juncture:
How long do you plan to stay in the new or refinanced home? Five years is what it usually takes to make a new mortgage worthwhile.
If you find a deal on a better home can you sell your current home for a practicable price? And can you cover the relocation and closing costs?
On the other hand, could your current home be improved, adapted and remodeled to answer the same needs as a new property?
Most importantly, do you really need to move or do you just want to make a favorable deal?
Lower mortgage rates are good, and they can save you money, but only if you’ll actually live in the house long enough to benefit. The potential changes in loan terms have to be worth it, too.
Consider the costs
When considering whether or not to refinance your mortgage, you want to realistically look at how long you plan on being in the home. Since there are closing costs that may amount to thousands of dollars, you have a look at how long it would take to break even if you were to refinance.
For instance, let’s say a 1 percent lower interest rate would decrease your monthly mortgage payment by $100. Great, but let’s also assume your closing costs on the refinance total $3,000. That means you’d need to stay in the house for 30 months just to break even on the refinance. If your plans were to possibly move in three years or less, you can see where a refinance may actually cost you.
Take a look at the most recent refinance rates below:
The amount of your equity
Another thing to consider is how much equity you have in the home. Most banks will require 20 percent equity in order to refinance your mortgage. It may still be possible to refinance without that much equity, but to get the best deal, you’ll likely need it.
In addition, if you’ve been living in the house for a while and have built up a decent amount of equity, you can possibly save even more money since you may be able to refinance an amount lower than the original loan amount. This can reduce your monthly payments since you’re now paying back a smaller loan.
Don’t forget about the new terms
Be aware that refinancing will also extend the term of the loan. If you’ve been making payments on your 30-year fixed mortgage for the past 10 years, you only have 20 to go. But if you refinance and you choose another 30-year mortgage, you’re back to the beginning. Some people choose to refinance from a 30-year to a 15-year loan if they already have a number of years of payments under their belts.
Also be aware that your credit history is more important than ever when it comes to refinancing. If your credit isn’t perfect or you have some negative marks on your report, you may find that you can’t even take advantage of the best refinance rates.
Other refinancing options to consider
You may be able to get assistance from government-backed programs like the Home Affordable Refinance Program, which offers refinancing for loans sold to either Fannie Mae or Freddie Mac. HARP works by making one or more adjustments to your mortgage, such as switching from an adjustable rate to a fixed rate, or shortening the term from 30 years to 15 years, so that you get a better and more affordable mortgage.
If you have an FHA or VA-backed loan, you may qualify for similar assistance through other government-backed programs like FHA Short Refinance. To see if you qualify, visit the Making Home Affordable website or contact your lender.
Alternatives to selling your home
If your desire to move is motivated by the apparent golden opportunities presented by the current market, you’re making an investment decision, not a decision about your home and lifestyle. With the favorable economic news lately, could it be that even better opportunities will be available to you next home selling season, or the one after?
What’s beckoning to you in a new home could be as close at hand as your current home if it were to be improved, adapted and remodeled to meet your needs. Home improvement projects can always make your home nicer, and more livable, and perhaps even easier to sell down the line.
Are you dissatisfied with the state of your neighborhood? You could get politically involved — volunteer work, a committee membership, or a seat on the school board could help change things. If you live in a condo, start at the homeowner’s association level. If you own a house, look to your neighborhood association or municipal government.
Options if you are going to sell
Rent your home: It’s not easy to meet lender requirements, but you may be able to rent out your home and still qualify for a mortgage on a new home.
Short term rental: Terms of a few days through a set amount of months, may generate enough income to make holding on to your home financially possible until you find a longer-term renter.
Sell with a rent back: Your buyers can assume ownership, but you stay as their tenant. This way you have a certain amount of time to find, buy and move into the new home.
Sell to a realtor: Some high volume realtors will purchase your home and later sell it for profit.