Refinancing your mortgage can help you lower your monthly mortgage payment and save interest in the long run. It can also give you greater stability if you want to refinance from an ARM into a fixed-rate loan or the cash for home renovations if you choose a cash-back refinance. Still, refinancing is a big decision and it’s best to be informed.
Here are 4 crucial things to understand before you decide to refinance.
#1. Know how much equity you have
Before you can refinance, you need to know how much equity you have in your home. This is one of the primary qualifications for a refi loan, but the amount of equity depends on the lender and loan product. In general, you will need at least 15% equity to qualify, but you will likely need more equity if you are choosing a cash-out refinance.
#2. Know what it will cost
In general, refinancing costs anywhere from 3% to 5% of your loan amount. You can likely roll all least some of these costs into your new loan, but remember that you will then be paying interest on the closing costs for 15 to 30 years. Another option is a no-cost refinance, although this isn’t technically true — it just means the cost isn’t upfront or in the same form. With a no-cost refinance, you can expect to pay a slightly higher interest rate that will cover the closing costs and more over time.
#3. You may need to pay private mortgage insurance (PMI)
If you are already paying PMI, this probably isn’t a big surprise. If your home has dropped in value since you took out your first mortgage, it can be a concern. For example, if you put down 20% when you bought your house to avoid PMI but your home has declined in value since then, you may need to start paying PMI for the very first time. Make sure you consider this before deciding if refinancing is the right choice by factoring it into your total costs when calculating your break-even point.
#4. Calculate your break-even point
The break-even point is when you recover the cost to refinance from the savings of your new loan. There is no rule that applies to everyone, but a break-even point within three years is usually considered reasonable. The sooner your break-even point, the more it makes sense to refinance and the smaller the interest rate difference that will be reasonable.
You can calculate your break-even point by dividing your expected total refinance cost by your monthly savings on your payment. This will tell you how many months it will take to recover the cost of refinancing. For example, if a refinance will cost $1,900 and you will save $150 per month, your break-even point is 12.5 months.
If you are considering refinancing your home loan, contact Primacy Mortgage to learn more about your options and speak with a loan representative who can help.