Refinancing Your Mortgage? Here's What You Need to Know
If you have one, your mortgage is most likely one of your largest expenses. As you look for ways to save each month to pay for that and several other bills, refinancing your mortgage could be a great way to save. This can help lower your monthly payment as well as provide other benefits.
Here are a few things to consider when going through the process.
Know What You're Trying to Accomplish
As with any major financial decision, be clear as to why you're pursuing refinancing as an option. Are you looking to lower your monthly payment? Does the new mortgage shorten its length? Refinancing should fit into your overall financial situation and then improve it. Be sure that you're clear on your objectives prior to obtaining a new loan.
Be Aware of Up-Front Costs and Fees
All mortgage refinances come with costs or fees, generally called closing costs. You'll receive a Loan Estimate and Closing Disclosure Form within three days of applying for a mortgage, according to the Consumer Financial Protection Bureau. There may also be an application fee. Other fees might include the costs of a title search to be sure the title is clear of any encumbrances or liens. There may also be costs to record the new loan locally. Some of these costs may seem small and insignificant, but don't ignore them because they can add up.
Be sure that you understand these fees and costs, as well as how and when they are paid. Do you need to come up with some or all of the money up front? Will the costs be rolled into the loan servicing to increase what you'll pay over the life of the loan?
If you're refinancing to obtain a lower payment, calculate how long it will take you to recoup the costs of refinancing via the lower monthly payments. If you don't think you'll be staying in your home long enough to recoup the cost of refinancing, it may not be worth it.
Consider the Total Cost of the New Loan
If you've had a mortgage for a number of years and are looking to refinance, you might end up with a lower rate or a lower payment, but in the long run the amount you will have paid in interest between the old and new mortgages could be more than if you hadn't refinanced.
If you're looking to shorten up the term of your loan, it's likely your payment will increase even if the interest rate is lower. Is the new payment a stretch? Can you afford this if you lose your job or become disabled?
Consider a Cash-Out Refinance
This type of refinance allows you to get cash tied up in your home's equity by borrowing more than is needed to cover the remaining amount of the mortgage. Perhaps you want to pay off some credit card debt, invest in a new business venture or cover the costs of college for your child. A cash-out refinance can be a way to accomplish these goals. Only you can judge if these are valid reasons to tap the equity in your home. The risk here is that your home is on the line.
Always weigh the pros and cons of a mortgage refinancing decision. Don't be swayed simply by a lower rate. Look at all the costs involved against the potential benefits, and work with a reputable lender and loan officer. Only then, and if it makes good financial sense, should you move forward.