Thirty years is a long time and homeowners with such mortgages are likely to refinance or sell before the original term is up. For all the conceivable reasons to refinance, the question of “When” solidifies any refi decision. Let’s find the answer to this question.
When you plan to refinance
Strictly speaking, there are no refinancing seasons for homeowners as there are spring home buying months for homebuyers. Markets sometimes create great opportunities for homeowners to refinance, e.g. when rates hit the floor.
Those events aside, you can refinance anytime from your end. But things can be technical with the lenders. When you ask one for a refinance loan, you will be likely asked about the following:
How are your credit and income? Have both improved since you took out your original mortgage? The refi route is essentially the same as that of your original purchase application if only for the fewer documents. Meaning, you still need to get approved for a refi loan.
How old is your mortgage? Before you may refinance your mortgage, a certain period of a few months to a year should have passed since your original mortgage closing date, and the required number of mortgage payments has been made. This is the “seasoning requirement” and varies depending on which mortgage you wish to refinance into.
How much is your equity? The first quarter of 2017 ended with more homeowners adding to their equity stash. You build home equity by making mortgage payments, thus the lenders’ seasoning requirement.
One thing you should not fail to check is any prepayment penalties. These are basically fines for paying your mortgage ahead of time.
When you refinance…
Costs are an integral, arguably a separate matter to look into, in any refi matters. These two numbers merit your consideration:
- Rates: They are variable and move along market forces and your personal factors. They also depend on (a) the kind of loan that you will take out, fixed-rate or adjustable-rate; and (ii) the term of the loan, longer-term loans have higher rates compared with shorter-term loans. Check with lenders on their advertised rates. Always ask about fees.
- Fees: The list of fees on any mortgage transaction does go on and they add up. Settlement fees, title insurance fees, appraisal fees, broker fees, commitments, etc. To lower your rates, you may pay points that represent one percent of the mortgage’s value.
For a loan of $200,000 with supposed closing costs of $2,000 and refinancing from 4.5% to 4.0%, your monthly payment shifts to $955 from $1,013.
Divide $2,000 by the projected savings of $58 and you’ll get 35, that’s the number of months you need to stick around the home to reach breakeven and recoup your refi costs.