What You Should Consider Before Refinancing Your Mortgage
Thinking about refinancing your home? Refinancing is essentially taking out a brand new (often higher) mortgage for your home, paying off your existing mortgage, and keeping what’s leftover, if anything, in cash. Some people refinance to lower their payment, usually by extending their mortgage term for more years, while others may refinance with a higher payment and shorter term so they can pay the mortgage off faster. Some refinance to a higher mortgage than they currently owe, up to the value of the property, to make a large purchase or invest into retirement savings. No matter what you want to refinance for, it’s not a decision to be taken lightly. Many factors will affect your refinance, but here are some top things to consider before signing that refinance paperwork:
- How are my finances and credit? Can I afford the new payment?
- Does the lender require homeowners or any other types of insurance?
- How much are closing costs? What about other fees?
- What is the current interest rate? Is it better than my current rate?
The first thing you should think about when considering taking out any type of loan is your own finances. How much do you have leftover each month after paying all expenses (other than your mortgage)? Does that leave you enough for the new payment? Refinancing will typically involve a new principal amount, new interest rate, and new loan term (length in years). Changing all of this can change your payment drastically, either up or down. It won’t do you any good to shorten your mortgage term to pay it off faster if you can’t afford the monthly payments. You also need to check your credit score and report before shopping for a refinance lender. Review each item on your report and have any incorrect information removed by the credit bureau. Your credit score and report play a huge role in what terms and the interest rate you’ll be offered in refinance.
You also need to know if the lender you are considering requires homeowners, private mortgage, or any other type of insurance as a condition of the refinanced mortgage. If they do, you need to take this into consideration when determining how much you can afford each month. Some lenders will add these insurance costs into the monthly payment and place the funds into escrow until they’re needed, but you should never assume and always double-check.
Just like with any loan, it’s important to know all the terms, so there are no surprises later on. Many people are surprised to find out that refinancing a mortgage has closing costs just like their original mortgage did. Closing costs are a blanket term to refer to various fees related to the refinancing process, such as:
- Applications fees
- Appraisal fees
- Title Search fees
- Notary fees
- Attorney fees
You can expect to pay 2-3% of the total mortgage amount in closing costs. Depending on the mortgage terms, the amount spent on closing costs can outweigh the savings of a lower interest rate, so always compare these costs to the savings you anticipate to see if the mortgage refinance really makes sense. Some lenders may offer a no-closing-cost refinance, which means the closing costs will be added to your mortgage principal amount. That means you’ll be paying interest on those closing costs over the life of the loan, which will end up costing you more. At Benefit Title Services, we save our clients an average of $250 during the closing of the refinancing process by reducing fees and eliminating all the “surprises.”
Interest rate is a huge factor in refinancing. Lenders typically post their current interest rates publicly, and they change often depending on market conditions and the mortgage terms. Fixed-rate mortgages will have the same interest rate for the entire life of the mortgage, while interest rates for adjustable-rate mortgages (ARMs) will fluctuate. Many people wait for mortgage interest rates to drop before refinancing, as a lower interest rate means you’ll pay less over the life of the mortgage. However, the interest rate a lender is advertising may not be the interest rate you get during your refinance. Your credit information will determine what interest rate you’re offered, and if you have not-so-great credit, you may be offered a rate much higher than what is posted. Always note what interest rate you’re offered and compare various lenders to see which offers the best rate. This will save you thousands over the life of the mortgage! Also, once you are offered an interest rate for refinancing, ask the lender about locking the rate in for up to 60 days while you finish the application process, so the rate doesn’t spike up suddenly between the offer and your closing date.
We are refi-experts in the state of Florida, having closed refinances in almost every county in the state. Contact Benefit Title Services in Tampa at (813) 251-1420 today for a quick, easy, and stress-free refinance experience.
