3 Most Critical Questions You Must Ask Before You Refinance
Low interest rates are catching the attention of not just homebuyers, but homeowners looking to refinance. If that's you, remember that refinancing is a huge undertaking. You'll go through all of the same steps you did when you applied for the original mortgage including paying fees, undergoing a credit review, conducting a home appraisal, and more.
In some instances, mortgage refinancing is not worth the time, effort and cost. This is especially true if the difference between the old rate and new rate is less than 1 percent. Anyone considering a mortgage refinance should first answer three important questions.
#1 - What is the total cost to refinance? The costs to refinance can add up to thousands of dollars by the time you consider all associated fees including appraisal fee, points, taxes, recording fees, legal fees, etc. Be careful with "no fee" type loans because they may have some costs. Depending on the mortgage, you may have the option of bundling the fees into the loan. Remember though that when you do this, you'll pay interest on these fees. Before you refinance, make sure doing so will actually save you money. If it doesn't, you might save more money by paying off the existing mortgage sooner.
#2 - How much of a difference will changing the mortgage term make? Some homeowners choose to refinance so they can switch to a shorter or longer mortgage term. A shorter term can save thousands of dollars in interest over the loan term. But the trade-off is usually higher monthly mortgage payments. Switching to a longer term mortgage can reduce monthly payments. Those who choose longer terms should try to build additional principal payments into their budgets. Doing so will enable them to pay off the loan balance sooner and save money in the process.
#3 - How much will refinancing actually save? Use available resources including mortgage calculators and brokers to help determine the monthly savings and the overall savings before initiating the refinance process. Then determine whether the money saved each month could be put to better use, for example, to repay debt, invest, or save for college.
These three refinance questions are designed to help you better understand your reasons for wanting to refinance. Pursuing a cash out refi and using the money to repay debt puts your home at great risk. Refinancing to save money isn't worth it if you don't end up with any savings. Refinancing into a shorter term mortgage isn't a good idea if doing so creates a financial hardship now or in the future. These issues should be carefully evaluated before deciding to refinance.
