Is it Time to Refinance? The Good, the Bad and How to Know For Sure
As market conditions cause interest rates to change, refinancing provides homeowners with flexible options and take advantage when rates are low. There are two major ways to refinance a home, with rate and term being the most common. Rate and term refinancing allows you to save money by restructuring your remaining balance to lower the interest rate and term. Cash-out refinancing involves taking out a new mortgage for more than you owe. You then use the difference to pay off existing debt.
While refinancing may be an excellent choice for some homeowners, it doesn’t always make sense to make the move. We’ll explore the benefits, downsides and how to find out whether it’s time to refinance.
Benefits of refinancing
Homeowners most often take advantage of refinancing because it lowers interest rates. Since interest takes up a good portion of the average mortgage, refinancing also can lower your monthly loan payments. It also allows you to adjust your home loan terms, or the amount of the time you have to pay off your loan. You’ll be able to pay off a 15-year loan faster than a 30-year loan because less interest accrues. If you can make the payments, the a shorter term lowers your overall loan balance. With refinancing, you can also switch to a fixed-rate loan from a more unpredictable adjustable-rate loan, which rises and falls depending upon the market.
Disadvantages of refinancing
While refinancing is a great option for homeowners looking to lower their monthly payments, there are some caveats to consider. Refinancing includes various fees, with closing costs making up the largest of these expenses. Closing costs on average run 1% of your loan’s total value. For example, if your loan’s principal is $300,000, then your closing costs total $3,000. You’ll also need to to pay for a home appraisal, title insurance, taxes, transfer and attorney’s fees. You may need to also purchase Private Mortgage Insurance (PMI) if you’ve paid off less than 20% of your loan balance.
To find out how much you would pay in closing costs, try our a refinance calculator.
Issues to consider
There are many questions you should ask before deciding to refinance your home. If you are unsure of how to answer the following questions, feel free to contact a Vantage West Loan Consultant and they would be happy to help you.
Does your home loan have a prepayment penalty?
Some lenders require that you make a payment when you pay your balance off early. These prepayment penalties can drive up your overall costs, since you’ll need to pay off your previous home loan before you refinance.
How long do you plan to stay in your home?
Staying put in your new home for a longer period of time ensures that you’ll recoup the closing costs and other fees associated with refinancing. If you plan to move within two years, then it might not be worth the trouble.
Have your levels of debt changed?
Your financial situation may have changed since you signed the original loan, which could impact your decision to refinance. Typically, those with debt to income ratios higher than 35% won’t qualify for refinancing, although there are exceptions. If you’ve taken on a long of recent debt or experienced an income drop, you may want to approach refinancing with caution.
Vantage West offers flexible refinancing options, along with the community-oriented member services you’ve come to expect. Whether you want to switch from an adjustable-rate (ARM) to a fixed-rate home loan or want to reduce your loan term, we’re ready to guide you along the way. Check out Vantagewest.org for more details or contact a loan consultant, who will be happy to walk you through the whole process.
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