Refinancing a home can result in significant savings if completed under the right conditions. Every home loan and borrower is different, so a good time to refinance for one homeowner does not necessarily apply to another. Prior to making a decision to refinance, think about these 5 factors in refinancing a home.
1. Your Unique Needs
Your personal situation will determine whether you should refinance and the programs that will meet your needs. How long do you plan to own the home? Will you need to refinance again? Do you expect to convert it into a rental property? Does your current loan include a pre-payment penalty? How much cash do you have available for closing costs? These are all important things to think about and to remember when calculating the benefits of refinancing.
2. Mortgage Rates
Mortgage rates are based on market conditions, credit rating, loan amount, and loan term. First, consider whether rates are expected to rise or fall based on what is going on in the economy and with the federal government. No one can predict the future, but there are particular events that can directly affect rates. Second, find out what rate will you receive with your credit history and loan amount. The rate you receive may not necessarily be the advertised rate. You will be offered lower interest rates if your credit rating is high. Lastly, compare the current rate to your existing one. The savings (per month and over the duration of the loan) should be weighed against the cost of refinancing. Typically, it is beneficial if the new rate is at least one percent less than the existing rate.
3. Expenses for Refinancing
It is important to understand both the overall cost of refinancing and the money payable at closing. Every mortgage has expenses associated with it. Loans promoted as having no closing costs typically mean that the costs are either added to the loan amount or are reflected in a higher interest rate. Some costs, such as pre-paids, are not classified as closing costs but require out-of-pocket expenses.
Normally, a refinance will mean some cash brought to closing. You may get some money back from the escrow account with the old lender to offset some or all of this cost. Additionally, you will have one month without a loan payment. For example, if you refinance during the month of June, you will have already remitted your June mortgage payment and the first installment due on the new loan will not be due until August 1st. An exception to requiring cash at closing is a refinance to cash out equity. In that instance, closing fees are deducted from the equity funds.
4. Home Values
You may have heard the term loan-to-value. This ratio describes the amount of your loan against the property value. The value of your home fluctuates with the real estate market. Although a real estate broker may provide a general estimate of value, an appraisal is required at the time you refinance to pinpoint the specific dollar value. Minimum loan-to-value ratios may apply (the exact ratio depends on the loan program). If the market value of your home is less than the mortgage balance, you may have trouble refinancing unless you have funds to reduce the loan amount. Some mortgage options, such as an FHA streamline refinance, may waive the appraisal requirement and thus make this less of a problem.
5. Mortgage Terms
Every mortgage program has specific requirements and restrictions. The following is a list of common factors:
? Loan-to-value Percentage
? Credit Score
? Property Type
? Loan Amount
? Percentage Savings Resulting from the Refinance
? Whether You Have Any Non-occupant Owners
? Mortgage Insurance Percentage and Duration