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Is Refinancing the Right Choice for You?

With record low interest rates hovering around 3.4%, you probably think it’s a no-brainer to refinance your home in 2013. With last year’s hectic stampede of refinances — making up 71% of all mortgages – you might not want to miss out now.

Before you move full-steam ahead, first determine if refinancing is really the best choice for YOU right now.

There are other factors to consider than just a super low interest rate.  Read these questions below and remember to always consult a financial advisor before making any decisions:

What should my current rate be before I even consider refinancing?

Given where interest rates are today, most experts say only consider refinancing if you get a minimum two percentage points difference in your rate. If your current rate is already low, then talk with a lender, do the math, call me and I’ll run the numbers with you too. In the long run, it may be not worth the cost to refinance.

I don’t have 20% equity in my home, what are my options?

Fannie Mae and Freddie Mac recently adopted changes to the Home Affordable Refinance Program (HARP). The program has been extended until December 31, 2013 with some new guidelines to help homeowners who are underwater. Under the revised guidelines, homeowners with a loan owned by Fannie Mae or Freddie Mac have the opportunity to refinance with any participating lender. The maximum Loan to Value (LTV) cap also has been removed. If one lender says you don’t qualify for a HARP refi, don’t take “no” for an answer, and try to find a lender willing to do it.

Should I keep my adjustable rate mortgage or refinance?

If you already have an adjustable rate mortgage and plan to live in your home for only a year or two, don’t refinance since chances are you loan is adjusting to today’s very low rates. However, if you plan to live in your home longer than 5 years, you might want to lock into a fixed rate because rates will go up by then and you want to lock in a low rate before they do.  Again, the answer to this question will depend on how long you plan to own the property so decide that first.

I have an FHA loan, what are my options?

The Obama Administration came out with a program that would make it less expensive to refinance for certain borrowers with mortgages backed by the Federal Housing Administration. However, you may not be able to shop around for the best interest rate since many banks say they will only service those that already have such a loan with them.  Another requirement for the program is that only borrowers with loans that were originated on or before May 31, 2009 are eligible.  Those that do qualify can save up to $1,000 a year on the fee reductions (not including any savings from a lower interest rate).

How much money do I need to refinance?

It’s not free to refinance so focus on the costs that accompany refinancing, which can eat into any money you saved with a lower mortgage rate. The average closing cost on a $200,000 mortgage is around $4,000. Get written estimates so you can compare each lender’s costs.   If you don’t have the equity that a lender requires and you don’t qualify for one of the government-backed refinancing options, you may need to come to the table with a lot of cash to make the refinance happen in addition to the costs of the refinance itself.

Can I afford the costs and fees of this process?

Refinancing costs include appraisals; application, underwriting and processing fees; and even a penalty for refinancing too early on your original mortgage. Plus, don’t forget there are closing costs! These may be rolled into the loan, but many financial experts advise against it.  Calculate how long it will take to recoup these costs through your lower monthly payments. Is it worth it?

Expert tip : If you stick with the same lender who originated your initial mortgage, you shouldn’t have new costs and he/she may offer an expedited process too.

How can I get a good rate with a lender?

Rates vary widely and are based on your FICO score and even what state you live in. Look at a variety of lenders, including independent mortgage brokers or credit unions.  Prepare for delays since some lenders are busy (especially in the early months of this year) and some won’t return phone calls.

What if I don’t plan on staying in my home for very long?

If you think you’ll be moving sooner than you think, then DON’T refinance. Even though you will save money on your monthly payments with the lower interest rate, it’s doubtful you will actually recoup the cost of the refinancing. Do the math and see how long it takes you and make sure you plan to stay in your home that long!

What’s better … cash flow or equity?

It really depends on your goal for refinancing. If lower monthly payments and more cash flow are your priorities, then don’t be too concerned that you’ve stretched out your payments over a new 30-year loan. However, if you’re more concerned with equity and saving money on interest payments, then go for the shorter 15-year loan if you can.  There is no “right” answer to this questions — it depends on your specific goals and objectives.

Now what?

Refinancing can be frustrating and confusing but the time involved and initial costs may be worth it for you in the long run.

Check out our mortgage calculator to crunch the numbers! Before you refinance, call me and I’ll review your costs, your savings, and help you decide if it makes financial sense for your specific situation.

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