If you’ve been in your home for a while, you may be asking yourself: Should I refinance my mortgage? Before you make any decisions, consider a few questions; the answers could help you save time and money.

What are common reasons to refinance?

To lower your monthly payment, interest rate or both: According to a recent AAA Consumer Pulse Survey, this was the motivation for more than 75% of respondents who would consider refinancing their homes. Generally, if you can lower your interest rate by at least a percentage point, then it might be a good time to refinance. You’ll have a lower monthly payment, and you’ll build equity in your home faster because you’re paying more toward principal and less toward interest. Keep in mind: There are fees for refinancing, and it can take time to recoup those costs. If you don’t plan to stay in your home more than a few years, refinancing might not make sense.

To get cash from the equity you’ve built: A cash-out refinance could let you pay off credit cards or other high-interest loans, or it could allow you to fund a child’s education, a home remodel or another major expense. Just remember that when you refinance to pay off debt, that debt doesn’t go away—it just gets redistributed.

To change the length of your loan: Switching to a shorter loan will allow you to pay off your home faster. For example, if you have 20 years left on a 30-year mortgage, you can refinance with a 15-year mortgage and pay off your home five years sooner. Plus, if a shorter loan comes with a lower interest rate, your new monthly payment could be similar to what you’re paying now.

To change the loan type: With an adjustable-rate mortgage, monthly payments change as the interest rate changes. A refinance gives you the chance to move to a fixed-rate mortgage with a lower interest rate—which won’t change over the life of the loan. On the other hand, if you have only a few years left on your mortgage, refinancing for another 15 or 30 years is probably unwise—no matter what the new loan terms are.

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When is refinancing worth it?

The answer to “Should I refinance my mortgage?” also depends on the details of the new loan. Before you redo your mortgage, make sure it’s a good move financially by answering these four questions:

  1. Can you offset refinancing costs? Shop around for the best offer, and then compare it to the terms of your existing loan. The monthly savings should offset the cost of refinancing within two or three years. If it takes longer than that to break even, or if you don’t plan to stay in your house for that long, refinancing might not make sense.
  2. Can you reduce your monthly payment? Make sure you understand what’s behind a smaller payment—a lower interest rate, a longer term on the loan or a combination of the two. Lengthening your loan term, for example, can reduce your monthly payment, but it increases the total amount you pay in interest.
  3. Can you drop private mortgage insurance (PMI)? If you didn’t make a down payment of at least 20% when you purchased your home, you’re probably paying PMI. But if refinancing increases your equity to at least 20% of the value of the home, you can stop paying PMI.
  4. Has your credit score changed? If your credit score has taken a hit since you took out your original home loan, you’ll probably pay higher interest rates when you refinance. But if your score has improved, you may get a lower rate.

What does it take to refinance?

  • Refinancing may be easier than you think. Ask your lender if they use an automated process for verification of your assets and employment—this could save you valuable time and paperwork.
  • Before you shop for a loan, get copies of your credit reports and review them to make sure the information in them is correct.
  • Before and during the refinancing process, avoid applying for new credit, such as taking out a car loan or getting a credit card.
  • Shop, compare and negotiate. Talk to your current lender about refinancing options. The loan officer may be willing to reduce or eliminate some refinancing fees.
  • Understand what lenders consider as they review your application. Usually, they check your credit history and score, the payment history on your existing loan, your income and employment history, and your equity and existing debt.
  • Ask your lender if you can roll your closing costs into your new refinanced loan.

This story was featured in the
May/June 2020 issue of AAALiving Magazine

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