Is Refinancing Right For Me?
[Continued from: Refinance Your Mortgage?]
When rates are low, homeowners look at current interest rates and compare them to the terms of their existing mortgage. If rates are very different, it's not unusual for homeowners to conclude they should refinance in order to take advantage of the lower rates.
Refinancing will not necessarily benefit each homeowner though. If you have a second mortgage, a lot of debt, or bad credit, it may not be worth refinancing.
First, consider how much equity you have in your home. If you financed your home for close to its full value only a few years ago, you probably don't have enough equity to make it worth refinancing, especially considering closing costs.
Second, consider your credit rating and your debt to income ratio. If you don't have strong credit or if you have a lot of debt, the rates that most lenders will offer you will either be higher than you are paying now, or not worth the costs of refinancing.
There are two other scenarios where refinancing is not a good idea.
The first is if you refinance in order to combine a first mortgage and a home equity loan, or if you receive enough cash back to cause you to finance more than 80% again, which would require you to carry PMI. This additional expense could cancel out the benefits of refinancing.
The other scenario is if you've been paying on the loan for a long time and almost have it paid off. Refinancing at that point would mean starting over on the loan and is rarely worth it, but you can ask the lender about setting the new loan term for the same amount of time you had left on your old loan.
To decide if it's worth it for you to refinance, find out the costs for refinancing, including points, transaction fees, and closing costs, and your new payment amount.
Compare that with your current payment and figure out how long it will take you to recover the costs as well as how much longer you plan to stay in the house.
If you plan to stay in that home for less than three years, it's usually not cost effective to refinance.
Our mortgage calculators can help you figure out the costs and benefits of refinancing!