Refinancing is a worthwhile endeavor if you think of reduced mortgage payments, savings on costs, and equity being built faster. It’s a financial decision that requires careful planning and examination. Your current personal circumstances might have dictated that you step back and reconsider refinancing. Here are some questions to help you decide if refinancing is right for you or not at this point. »Do you need help in your current mortgage?»
Moving Out Soon?
Refinancing would be unwise if you plan to move out of the house way before you hit your refinance break-even period. This is defined as the time when you are able to recoup the costs associated with refinancing.
How long is that break-even period depends on a number of factors such as the closing costs on the new loan, the new interest rate, the current interest rate, and the number of years you plan to stay in the home.
Having Financial Problems?
If you’re having major financial problems, refinancing is not the avenue to borrow money or consolidate debt. On the contrary, it might jeopardize your home if you slide into more debt, bankruptcy or default.
When you do a cash-out refinance, you’re adding money into the new loan amount with interest. While the mortgage interest rate is lower compared to that of credit cards, where you put the funds into, you’re likely to repay the cash-out plus the mortgage debt for a longer period of time. Refinancing often to do a cash-out leads to a scenario when you’re no longer able to repay the mortgage debt as you keep pushing back the mortgage repayment deadline.
Can’t Afford Closing Costs?
Another reality that homeowners face when refinancing is incurring a new set of closing costs. There are two ways you can pay the closing costs:
- Pay the closing costs using your own money.
- Finance the closing costs into the new loan.
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The difference between the two options is the timeframe: the first option requires that you pay upfront while the second one allows you to defer it until such time you are making payments on the mortgage. Financing the closing costs can mean a higher rate, thus a higher monthly payment.
Have a Prepayment Penalty?
A prepayment penalty is incurred when you sell or refinance your home prior to a period as set by the lender. Oftentimes, these fees prove to be expensive that you have to consider whether the savings to be derived from refinancing would outweigh these fees.
Your credit score primarily determines your rate. There are lenders who may be willing to qualify you for a refinance, but at what cost? If you’re looking to get the best deal possible, it may be wise to hold out until your credit has improved.
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Nearing Mortgage Repayment?
If you’re close to repaying your mortgage, it makes sense to continue repaying and defer refinancing for these reasons:
- Extending the term. If you’re taking out another 30-year mortgage, you are effectively starting over again. Even if you factor in the lower rate and lower monthly payment, remember that you will be making payments for another 30 years.
- Shortening the term. You switch to a 15-year fixed to cut back the term, build equity faster and pay off the mortgage faster. However, 15-year fixed mortgages have higher monthly payments that you might not afford later on.
Why do you refinance if not to reduce a part of your mortgage payment and make repayment more comfortable and affordable? If some or all of the above factors apply to you, you might want to reconsider refinancing until such time as you believe the savings would outweigh the costs in the long run. »And we can help you get matched with a lender!»
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.