Should I Refinance My Mortgage?

By Diana Palmieri

With mortgage rates at historic lows, this question seems to be on every homeowner’s mind.  Although rates certainly are attractive, there are many things to consider before moving forward.

Every day, thousands of people refinance their home mortgage because of a myriad of attractive reasons, including the following:

• Lower interest rates.
• Debt consolidation (beware, as you are combining your credit card and personal loan debts into a longer term).
• Shorten or lengthen the duration of their loan.
• Lower monthly payments.
• Cash out for home improvements.
• Lock in a fixed rate (from an adjustable rate mortgage–ARM).
• College expenses.

Prior to going to your lender and refinancing, you need to define your goal as to why you want to refinance.  Most will become blinded by a low rate and refinance without thinking about the potential extra money it will cost to get your new loan in place.  A refinance is not a payoff; it is a restructuring of your old loan with new terms.  There is a price to pay for those new terms in the form of closing costs.  According to a Bankrate.com 2011 closing cost survey, the national average for a closing on a $200,000 home is $4,070.  That does not include taxes, insurance, and certain prepaid items such as homeowners’ association dues.  New York State has the highest average at $6,138.  You need to figure out how long it is going to take you to recoup the closing costs.  Using the national average figure from Bankrate, if you save $200 a month on your mortgage payment, it will take you about 20 months (a little under two years) to recoup the $4,070 you paid in closing costs.  If you plan on staying in your house for some time, then it might be worth it.  If you think you are going to move within the next couple of years, refinancing is not such a good idea.

There are many factors the lender will consider before refinancing, which include the following:

• The value of your home.
• Your credit worthiness.
• Current debt.
• Income and current employment.

Lending rules have become quite stringent in the past few years, and lenders are not going to approve you very quickly.  It is important for you to know where you stand.  Aside from the factors above, know your current loan and terms (rate, balance, and payment) and, most importantly if there is a prepayment penalty.  I have talked about credit worthiness in past articles, and a good credit history is most important in a mortgage refinance rate.  Remember, you are applying for a mortgage, so you will need to be in good standing in both your credit ratings and the debts you owe outside the mortgage.  You can always check out your free credit report online by going to any major credit agency’s Web site (Equifax, Experian, and Transunion).  You are entitled to your free reports annually.

You also may want to consider consulting a mortgage broker.  A mortgage broker usually has access to many different lenders and will shop around to get the best rate for you.  Mortgage brokers get paid by charging closing costs up front, so shop around and do not be afraid to ask what they will charge you.  If you have a good relationship with your bank and feel comfortable there, find out the bank’s costs and compare.  The important thing is to shop around and, of course, get what’s best for you and your situation.

Something else I should mention is Private Mortgage Insurance, also known as PMI.  If your loan-to-value ratio is more than 80 percent of the appraised value of the home, you will have to pay additional mortgage insurance. PMI can cost up to an extra $100 a month, perhaps defeating the purpose of refinancing for a lower monthly payment.

As you can see, there is a lot to consider and understand when refinancing your home mortgage.  Do your homework, ask questions, and know the facts before you sign away.

The information contained in this article is not intended to constitute legal, accounting, tax, investment, consulting or other professional advice or services. For specific information that applies to your circumstances you should consult a qualified tax advisor or independent professional advisory.

Diana Palmieri is dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated. Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB. 
 

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