Refinancing your home can be a great way to add a boost to your budget. Lowering your payments can add cash to your budget to be applied to other debts, or to increase savings. Is now the time to refinance?
Interest Rates are Low
Although they change daily, mortgage interest rates recently have been as low as 4.625%. If your current mortgage is higher than this, it may be time to call a mortgage broker. For every 1% change on $100,000 of 30-year fixed mortgage debt the monthly savings is approximately $60.00. For example if you have a $300,000 mortgage at 5.625% and can refinance that amount down to 4.625%, your monthly savings will be $180.00 [60*3=180]. $180 per month is an annual savings of $2,160.
Do you carry more than one loan on your home?
If you can combine a first and second-mortgage into one payment the savings will add up quickly. Most second mortgages carry significantly higher interest rates than the first, and if you have the opportunity to refinance the second into the first or into a lower interest rate it’s time to act.
How’s your credit?
The primary factor in the interest rate you will receive in a refinance is your credit. It’s important to know your credit rating going in. Everyone is entitled to one free credit report per year [www.annualcreditreport.com] Get your report and be aware of your rating before contacting a mortgage broker.
Beware of costs
Refinancing is not a free process. Be ready to pay $3,000-$4,000 for expenses. It is sometimes possible to “roll†this amount into the refinance mortgage, but one way or another you will be paying for the process to refinance. Consider your annual savings ($2,160 on the example cited above) and the length of time you plan to live in your home. If you will recoup the cost of refinance before you plan to sell the home, it makes sense to refinance.  But keep these costs in check. Don’t be afraid to shop around multiple brokers for offers. The charges can vary greatly.
Appraisal risk
One of the biggest risks in the current market is if your house will appraise for the required amount. In order to avoid PMI your equity in the house must be greater than 20%. For example, if your home is worth $350,000, your maximum mortgage amount should be $280,000 [20%*350,000 = 70,000]. If you plan to mortgage the entire $280,000 your home must appraise for more than $350,000 to qualify.
If low interest rates and combining mortgages are a good fit for you – it may be time to refinance. Just beware of the pitfalls and costs before starting the process.
– By Michele Steinberg, Geezeo.com
