Does it pay to refinance?
Just when we thought the days of easy money and using your home’s equity like a piggy bank were over, they keep pulling you back in. With mortgage rates as low as they’ve been during the past several months, reworking your home’s mortgage has become a necessity for some homeowners, or at the very least, an impossibly attractive situation for others.
Regardless of what you read or hear on TV not every homeowner in the country is underwater. There are plenty of homeowners who still have considerable equity in their properties and even more who have great credit ratings and want to take advantage of the historically low mortgage interest rates to lower their monthly carrying charges. The question for these people is – does it really pay to refinance?
If you’re considering a refinance, you need to get busy, since the window may have already closed on the lowest rates in over 35 years. Less than two months ago, the rates were down to their lowest point for a 30-year fixed rate loan of 4.17 percent. Then they jumped to 4.39 percent, and as of this writing they were around 4.57 percent. Fifteen-year loans are even lower, bottoming out at 3.57 percent, then climbing to 3.76 and now sitting at 3.97 percent.
In spite of the rates going up, these are still great numbers, and if you’re just waking up to what’s been going on ,you need to ask yourself a few questions and a take a few first steps.
The first thing to do is find out what your credit score is, a vital number that can influence every part of your life. You can get your score on line from Equifax and the other credit reporting companies for a modest fee. If your credit score is anything less than 740, 818 is the highest, you could have a problem with a refinance in today’s tight qualifying market or you may have to pay a higher rate. You will also need to have at least 20 percent equity in your home.
Next, calculate your new monthly mortgage rate based on the amount of loan you will need to satisfy your current mortgage and cover closing cost. You can find mortgage calculators and current rates on line at bankrate.com as well as other websites. After you have all of this information, you can determine your break even point, or the number of years it will take you to recoup your closing expenses based on the monthly savings.
For example, if you’re monthly mortgage payment is reduced by $200 and the closing costs to refinance the loan are $7,000, your breakeven point is about three years. As long as you plan on staying in your home for at least three years, then it makes sense to refinance. Of course, if you and your home both qualify, you can opt to take out some of the equity in the property by requesting a higher mortgage.
According to a survey from the Mortgage Bankers Association, the refinance index dropped 21.6 percent during Thanksgiving week. It’s likely that most homeowners who were able to refinance have already done so, making this a good time for those homeowners who have not yet started the process with less backlog on the lender’s books.
Although refinancing can be a positive financial decision, I fear that some homeowners will get themselves in trouble by pulling out equity in what is still a unpredictable real estate market. Whatever your choice is, be careful not to get pulled back in to an easy money mentality.
