Refinancing a mortgage can save borrowers a substantial amount of money as long as they refinance the right way. If you think refinancing might be the right choice at this point in your mortgage, there are a lot of questions you should ask before taking that plunge. Set up a time to sit down with your Loan Officer to discuss your motivation for refinancing as well as your current financial situation and future plans to figure out what type of refinancing - if any - is right for you.
It is important to work with your Loan Officer to understand every risk and additional cost associated with refinancing. Here are some important questions to think through with your Loan Officer when starting the refinancing process:
1. Why Do You Want to Refinance?
Consider your specific intended outcome for this refinance. If your Loan Officer understands exactly why you want to refinance, he or she will better be able to assist you in finding the right type of refinanced loan for you. Let's say, for example, your goal is relatively basic: to save money. You might not realize that refinancing your loan back up to 30 years to lower your mortgage payments could actually cost you more in the long run than you are currently paying. Starting back at 30 years means increasing the amortization period, which means paying a lot more interest over time. You might not understand what kind of refinancing loan is best to save you money, and that's where your Loan Officer comes in. The Loan Officer can help you figure out how to refinance your mortgage with terms that would potentially allow you to pay it off in the same number of years you have left on your current mortgage.
Now let's say you are interested in a cash-out refinance because you want to pay off your credit card debt. A cash-out refinance involves taking out a mortgage for more than the original amount, which puts some cash back in your pocket and will help you pay off that credit card balance. This could be a great idea because interest rates for a mortgage are lower than typical interest rates for a credit card. It only works, however, if you have the resources to keep making those mortgage payments for a longer period of time. Your Loan Officer can help you understand whether a cash-out refinance is right for you based on your specific financial situation.
A cash-out refinance involves transferring your debt from a credit card company or other creditor into debt that is wrapped up in your home, which puts you at risk of foreclosure if you don't make payments on time. Work with your Loan Officer to decide if you are in a position to take this risk.
2. How Long Will You Stay in Your Current Home?
If you're thinking about moving any time in the near future, chances are refinancing to another 30-year fixed-rate mortgage is not the right choice. Due to the high closing costs that come with refinancing a mortgage, it generally takes a while for a homeowner to break even and begin to save. NerdWallet estimated closing costs to be about 3-6 percent of the total cost of the loan.1 Your Loan Officer can help you figure out how long it will take you to break even on different refinance loans, which can help you determine which one is best for you and whether it will be worth it.
According to Realtor.com, refinancing typically will not save borrowers money if they plan to move within five years.2 It is possible, however, that a low interest adjustable rate mortgage could still help you save in the short term, so make sure to ask your Loan Officer about that option.
3. What Does Your Credit Report Look Like?
If you originally obtained a mortgage loan with a worse credit score than you have now, refinancing can probably help you get a much better deal. If the situation is reversed and your credit has taken a turn for the worse since the mortgage was taken out, your Loan Officer will probably advise you to take some time to rebuild your credit before refinancing. Look over your credit report with your Loan Officer to discuss your options.
There are many other factors that go into deciding what type of refinance option is right for you. Your Loan Officer is the best resource. He or she knows you and your finances well and will be able to advise you on the route that will have the most benefits for you and your family. The refinancing process can be overwhelming, and there is no reason to figure it all out on your own.
Sources 1NerdWallet 2Realtor.com