To Refinance Or Not To Refinance

February 28, 2013

If you've been in your new home for a few years, these all-time low interest rates may make it tempting to refinance but there are several factors to consider before jumping into that brand new mortgage. Re-qualify All Over Again - When refinancing a home, the qualification process starts all over again. Mortgage lenders look at gross income, credit debts, assets, liabilities and credit scores and then plug those numbers into their loan qualifying formulas. Refinancing a Loan Costs More Money - Just as in the initial mortgage, refinancing will incur closing costs; however, with a refinance these costs can often either be paid out-of-pocket at closing, or they can be rolled into the cost of the loan. Where's the Break Even Point - A determining factor could be how long you plan to stay in the home. A little math will help determine the break-even point. For example, if the new payment saves $100 each month and the refinance costs $3,500 in closing costs, it will take 35 payments (almost three years) to break even. Look at Different Term Loans - With a lower interest rate, it may make shorter loan terms such as a 15 or 20-year mortgage more affordable. Lowering the number of years on your loan will lower the interest paid overall. Compare the numbers and take a look again at how long you intend on staying in the home. A shorter-term loan will build equity faster since more to principle will be paid in each payment. Shop for the Best Interest Rates, Closing Costs and Service - Keep in mind that the mortgage lender quoting the lowest interest rates might charge the highest closing costs. Beware of online lenders promising ridiculously low mortgage interest rates. If they sound too good to be true, they are. Ask your current mortgage company what their refinance terms are, but remember that you're not obligated to refinance with them. Talk with your local bank's mortgage department and ask friends for mortgage lender referrals. Once you weigh all the pros and cons, if you decide to move forward with a refinance, avoid credit purchases until the new loan is in place. This means no new cars, furniture or big-ticket items on credit cards or new lines of credit until the closing takes place. Also, don't change jobs as that could affect loan-qualifying process as well.
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