With today’s low rates, you may be thinking about refinancing your current mortgage. Before you do, you want to make sure that it’s worth your while and right for your current financial circumstances. Here are some things you should consider when deciding to refinance your current mortgage.
Consider the Interest Rate
The rule of thumb when it comes to refinancing is that you want to reduce your current interest rate by at least 1%. Anything less than that may not be worth the added expenses and closing costs that you will incur with a mortgage refinance.
Consider the Closing Costs
When you refinance, you are paying costs associated with being approved for a new mortgage just like you did with your initial mortgage. These costs include appraisal fees, title insurance costs, lender fees, attorney fees and taxes and costs to file the mortgage. Closing costs can be from 3 percent to 6 percent of the principal amount of the loan so you want to assess how long it will take to recoup should you decide to go ahead with the refinance.
Consider the Mortgage Term
Your refinance may allow you to reduce the term of your loan. For example, you may decide to get a 15-year mortgage instead of your current 30-year mortgage. This will allow you to pay off the mortgage earlier. If the rate has reduced substantially, changing the term of your loan may not impact the payment that much and yet reduce the number of years it takes to repay.
Consider Your Equity
Tapping into your home’s equity may be one of the key reasons you may be weighing a refinance. Because you already own your home, this equity can help with current household expenses or other financial needs. If you have substantial equity you would like to make use of, a refinance may be a good option. Having equity in your home will make a refinance easier when considering loan to value ratios. You may also be able to drop any PMI premiums if your refinance is under 80% of the appraised value of your home.
Consider That A Refinance is a Whole New Mortgage
Refinancing your loan will begin the clock all over again. Your old mortgage will get paid off and your refinance will be a whole new mortgage. So, you will go back to square one with a 30-year or 15-year loan, regardless of how many years you have paid into your old mortgage.
Consider How Long You Will Stay in the Home
If you don’t plan on staying in your home long, then it may not make good sense to go through the time and expense of refinancing. A good way to calculate how long it will take to recoup your closing costs are as follows: closing costs divided by the reduction in your yearly payment equals how long you need to remain in the home in order to break even on your closing costs. For example, if your closing costs equal $3,000 and your new refinanced payment saves you $150 a month ($1,800 a year), it would take over 1.66 years to break even.
If you are thinking about refinancing your Stockton, CA home but don’t know where to start, we would be glad to answer any questions you may have. Call us today at (209) 477-0262 for a free consultation while rates are low.