Should I refinance my mortgage or stay put?
It is a topic you will hear often, refinancing your mortgage. When interest rates are significantly lower than in the past, paying off an existing loan and replacing it with a new one can make good financial sense, but sometimes it may be more beneficial for you financially to stay with your current loan.
There are many reasons why you may benefit from a refinance and many factors to consider when making this decision.
REALTOR Infographics - The infographic provided courtesy of Keller Williams Realty International.
Some examples of potential benefits from refinancing your mortgage:
- The opportunity to lock-in a lower interest rate
- Shorten the term of your mortgage
- Tap into your home's equity to finance a large purchase
- Convert from an adjustble-rate mortgage (ARM) to a fixed-rate mortgage (or vice versa)
- Consolidate debt such as a credit card balance or car loan
Some examples of factors to consider before you refinance your mortgage:
- How long do you plan on staying in your home?
- Are the costs involved more than what your monthly savings will be?
- Does your current loan have a pre-payment penalty (this is a fee that lenders might charge if you pay off your mortgage loan early, including for refinancing).
Refinancing can cost between 3% and 6% of the loan's principal and it will take a number of years to recoup that cost with the savings generated by a lower interest rate, shorter term and lower monthly payment. Also, like taking out the original mortgage, it will require an appraisal, title search and applications fees. If you are not planning to stay in the home for more than a few years, the cost of refinancing may not be recouped, negating any of the potential savings. Be sure to run an amortization schedule for the current mortgage and the potential refinanced mortgage to determine which is the best financial decision.
Also, you can ask for a copy of your settlement cost papers (the Hud-1 form) in advance of your loan closing. This will give you a chance to review the documents and verify the terms. Since 2010, the HUD-1 settlement statement also contains what if referred to as a Good Faith Estimate or GFE. This additional set of figures specifies estimated settlement figures provided by the lender upon application of the loan.
Borrowers may compare their Good Faith Estimate to the HUD-1 Settlement Statement and ask their lender or broker about any changes.
Refinancing is not the only way to decrease the term of your mortgage.
By paying a little extra on principal each month, you will pay off the loan sooner and reduce the term of your loan. For example, adding $50 each month to your principal payment on the 30-year loan ($250,00 mortgage) reduces the term by more than 2 years and saves you more than $18,000 in interest costs.
Refinancing can be a great opportunity to save money in the long run to help secure your retirement needs, but make sure you crunch the numbers to determine if it will actually be a savings or if it will cost you.
Carol Chaudet
(last updated 05/21/2015)
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