Wondering if refinancing your mortgage is something you should look into? That answer depends on what you want to get out of it.
Refinancing, or paying off your existing mortgage with a new one, could be worth it when it saves you money. And with interest rates near historic lows - around 3.5 percent as of mid-September, according to the Mortgage Bankers Association - it very well could help you save.
However, just because rates are low, doesn't mean that refinancing is the right option for everyone.
In fact, refinancing costs and rates vary on a case-by-case basis.
"The approval process is much more restrictive than it used to be and there may be more of an expense up-front [for some people]," warns Joe Gross, a national mortgage expert and the author of the book "The Greed of Wall Street."
Looking for a little guidance on whether or not you should refinance? We've put together a list of questions you can ask yourself to help you make a decision...
Question #1 - Will I get a lower interest rate if I refinance?
It only makes sense to refinance if the new mortgage is going to be better for you financially, right? Then, the first place to look is the interest rate, which is a good indicator of how much you could be saving.
Just consider this example: If you have a $100,000, 30-year fixed-rate mortgage with a 6 percent interest rate, your monthly payment will be $600. Refinancing your mortgage and dropping your interest rate to 3.5 percent (the current historic low) could lower your monthly payment to $450 - saving you $150 a month. Sounds pretty nice, doesn't it?
Talk to your mortgage broker to find out if - and by how much - you might be able to lower your interest rate by refinancing. But keep in mind, the interest rate is just one piece of the puzzle. Sometimes a low interest rate might come with high fees.
While interest rates are low now, Gross says, "You still need to run your numbers. Ask yourself what the new loan will cost you, how much will you save on a monthly payment, and how much on the life of the loan."
Question #2 - How good is my credit score?
Why should you care about your credit score when it comes to refinancing your mortgage?
Here's one reason: Lenders may use it to decide whether or not you are a good risk for a home mortgage, and how much interest to charge you if you get the loan, according to the California Department of Consumer Affairs.
So what's a good score? Well, FICO credit scores - developed by Fair, Isaac and Company, Inc., and today's most frequently used scoring structure - can range from 300 to 850.
And the higher the score, the better.
In fact, "If your credit is below 580 or 620, you'll have a harder time getting a mortgage these days," Gross says. "Work on raising your credit score before you apply for a mortgage, then walk into the local bank or call a broker to see what they offer. Look at all your options and see what's the best way to go."
If your credit score isn't up to par, don't worry. There are a few things you can do to help improve your score, like paying your bills on time and paying down your credit card balance.
Question #3 - Can I afford the refinancing costs?
If you're paying six percent interest on your mortgage right now, it might feel like a no-brainer to try and refinance to a 3.5 percent interest loan. But before you sign off on that new loan, you need to know how much refinancing will cost you.
To give you an idea, the Federal Reserve's "Consumer's Guide to Mortgage Refinancing" notes that "it is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees."
The Federal Reserve, which is the central banking system of the United States, adds that refinancing fees could include the following:
- Application fee
- Loan origination fee
- Appraisal fee
- Home inspection fee
- Home insurance
- Attorney review/closing fee
- And more
"A lot of the refinance cost is incorporated into the loan so you might not feel it," Gross says. But you're still paying it - sometimes as much as $15,000 or more, according to Gross. "Find out what the refinance will cost and take that into consideration. Sometimes the cost doesn't outweigh the savings."
Question #4 - How long do I plan on staying in this home?
This is one of the more important questions to ask yourself, because if you are planning to move within one or two years, refinancing might not be worthwhile for you.
For example, if you save $100 a month with your refinanced loan - but the loan costs you $2,400, you'll need to live in your home for 24 months before you'll start saving money.
To determine if refinancing aligns well with your future plans, Gross encourages you to look at your family goals.
For example, you might want to ask yourself:
- Are you buying a smaller house with the intention of moving to a bigger one down the road?
- Are you thinking of moving out of state in a few years when you retire?
If the answers to these questions indicate that you'll be moving out of your house in the near future, then refinancing isn't the best idea.
Question #5 - Does my current mortgage have a pre-payment penalty?
While Gross says they're not as common these days, pre-payment penalties - which are fees you have to pay the bank for ending a mortgage early - do exist. So, before you decide to refinance, you should check to see if your current mortgage has one.
If your current loan does have a pre-payment penalty attached to it, start by finding out how much it will cost you. If you run the numbers and find that the pre-payment penalties are just too expensive, then refinancing may not be the best idea.
However, Gross says you can always call your bank to see if there's anything they can do for you.
"Sometimes you can try to negotiate with your bank not to charge the penalty," Gross says. "That's not to say the bank will give it up, but it never hurts to ask."
The Federal Reserve offers similar a recommendation. "If you are refinancing with the same lender, ask whether the pre-payment penalty can be waived. You should carefully consider the costs of any prepayment penalty against the savings you expect to gain from refinancing."
Question #6 - How stable is my job?
One of the things banks and mortgage brokers look at when determining whether or not they'll approve you for a loan is the stability of your employment.
Does that mean you won't qualify for a loan if you've hopped around jobs?
Not necessarily, "but you do need continuous employment," Gross says. "Banks want to make sure you'll have a job two months from now, so they want to see a good history of employment in your past."
Gross adds that "if you're in the middle of a refinance, don't switch jobs before you finish the transaction." Why? Because you don't want to give banks any reason to doubt your ability to pay the mortgage going forward.
Does the same apply for people who are self-employed? Things might be a bit trickier, but that doesn't mean you won't qualify for a refinance.
According to Gross, "Self-employed people are seen as more of a risk for banks, who tend to be a bit more cautious when lending to them." To help, Gross says "you have to have a few years of history of self-employment."
Question #7 - Do I need to make any big purchases in the near future?
If you're considering refinancing, ask yourself if you can put other big-ticket items on hold for a while. If you can't, Gross says refinancing may not be in your best interest.
"Don't take out new debt at the same time you're trying to get a refinance," Gross says. "Some people think that 'the bank will see I just got a new car, so of course they'll give me money' - but in truth the bank worries if you have a new car (and new car payments) how will you pay the mortgage?"
And while it's okay to have some debt - like student loans or car payments - it's important to make sure that you can manage all of your payments comfortably, including refinancing costs and monthly payments.
As a final bit of advice, Gross says, "Even if you've already applied for a refinance, don't take on new debt until the deal has closed."
- credit score