When you get a 30-year, fixed rate mortgage, you’re stuck with that mortgage until you’ve paid off the last penny, right? Not so fast. While you can stick with your mortgage, you don’t have to, nor may you want to. In some cases, it can make sense to refinance your loan, so that you can get a better interest rate or change the terms. Refinancing doesn’t make sense for every borrower, so there are some things to know first.
Types of Refinance
As Bankrate notes, there are two main options for refinancing, rate-and-term, and cash-out. The goal of rate-and-term refinancing is usually to save you money by either reducing the interest rate or shortening the term of the mortgage. You can also get a lower monthly payment with this option by lengthening the term of the mortgage, but you are likely to pay more in the long run. A cash out refinance lets you borrow more than you owed on the first loan. You can use the extra cash to pay off other debts or for other reasons.
The Appraisal Process
Typically, an appraisal is part of the refinancing process. It lets you and the lender know what your home is worth. Depending on the outcome of the appraisal, it can either help or hinder you. If the person doing the appraising finds that your home’s value is higher than expected, you might get offered a better interest rate on your new loan. The difference between what you owe and what the home is valued is called loan to value ratio. When it’s lower, you can get a better interest rate and avoid paying private mortgage insurance.
But, if the appraiser determines that your home is worth less than you thought or if its value has dropped since you got the original loan, you might not get the best deal when refinancing. In some cases, a negative appraisal can mean you’re unable to refinance. If you think there’s a chance that your home value has dropped, refinancing programs that don’t require an appraisal, such as the FHA Streamline program, can make sense.
When Refinancing Makes Sense
Refinancing makes sense when it saves you money. That means not only looking at the interest rate but also at the closing costs and at how long you plan on remaining in the home. For example, if you are 10 years into a 30-year mortgage, and decide to refinance to a 20-year loan at a lower interest rate, saving $50 per month, but the closing costs on refinancing are $2,500, it will take you a little more than four years to break even and actually save money compared to your original loan. If you sell or move before then, you won’t recoup the costs.
There’s a lot to consider when thinking about refinancing. For personalized help deciding if it is right for you, contact a mortgage specialist today!
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